Analyzing Break-Even Point, Setting Target Profit Degree of Operating Leverage
Fred Carson delivers parts for several local auto parts stores. He charges clients $0.75 per mile driven. Fred has determined that if he drives 2,000 miles in a month, his average operating cost is $0.55 per mile. If he drives 4,000 miles in a month, his average operating cost is $0.40 per mile. Fred has used the high-low method (covered in Chapter 5) to determine that his monthly cost equation is: Total Cost = $600 + $0.25 per Mile.
Required:
1.Determine how many miles Fred needs to drive to break even.
2.Assume Fred drove 1,500 miles last month. Without making any additional calculations, determine whether he earned a profit or a loss last month.
3.Determine how many miles Fred must drive to earn $1,000 profit.
4.Prepare a contribution margin income statement assuming Fred drove 1,500 miles last month. Use this information to calculate Fred’s degree of operating leverage.
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