Russell Preston delivers parts for several local auto parts stores. He charges clients $0.75 per mile driven.
Question:
Russell Preston delivers parts for several local auto parts stores. He charges clients $0.75 per mile driven. Russell has determined that if he drives 3,000 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 $0.50 per mile. Russell has used the high-low method to determine that his monthly cost equation is: total cost = $600 + $0.35 per mile.
Required:
1. Determine how many miles Russell needs to drive to break even.
2. Assume Russell drove 1,800 miles last month. Without making any additional calculations, determine whether he earned a profit or a loss last month.
3. Determine how many miles Russell must drive to earn $1,000 in profit.
4. Prepare a contribution margin income statement assuming Russell drove 1,800 miles last month. Use this information to calculate Russell’s degree of operating leverage.
Contribution MarginContribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Step by Step Answer:
Managerial Accounting
ISBN: 978-0078025518
2nd edition
Authors: Stacey Whitecotton, Robert Libby, Fred Phillips