Analyzing Break Even, Preparing CVP Graph, Calculating Degree of Operating Leverage, Predicting Effect of Price Structure Changes
Cory Bryant runs a courier service in downtown Phoenix. He charges clients $0.50 per mile driven. Cory has determined that if he drives 3,000 miles in a month, his total operating cost is $875. If he drives 4,000 miles in a month, his total operating cost is $1,025. Cory has used the high-low method (covered in Chapter 5) to determine that his monthly cost equation is: Total Monthly Cost = $425 + $0.15 per Mile Driven.
Required:
1.Determine how many miles Cory needs to drive to break even.
2.Calculate Cory’s degree of operating leverage if he drives 4,200 miles.
3.Suppose Cory took a week off and his sales for the month decreased by 25 percent. Using the degree of operating leverage, calculate the effect this will have on his profit for that month.
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