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i safari File Edit View History Bookmarks Window Help ? ey , 55% D. * ? ?:)) Tue Jun 19 6:51 PM Alex a ezto.mneducation.com 0? Home - alamo.edu Chapter 6 Exercises value 11.11 points 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 S0.55 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 S0.35 per mile. Required: 1. Determine how many miles Russell needs to drive to break even. k-Even Miles Miles 2. Assume Russell drove 1,800 miles last month. Without making any additional calculations, determine whether he eamed a profit or a loss last month. Loss Profit 3. Determine how many miles Russell must drive to earn $1,000 in profit. Target Miles Miles 4-a. Prepare a contribution margin income statement assuming Russell drove 1,800 miles last month. RUSSELL PRESTON Contribution Margin Income Statement For Last Month 19 popcorntime ap

Explanation / Answer

SOLUTION

1. Break-even units = Total fixed cost / Unit contribution margin

= $600 / $0.40 = 1,500 miles

Unit contribution margin = Sales price - Variable cost per unit

= $0.75 per mile - $0.35 per mile = $0.40 per mile

2. Russell would have made a profit if he drove 1,800 miles, because it is 300 miles above the break-even point (1,800 miles - 1,500 miles).

3. Target units = (Fixed cost + Target Profit) / Unit contribution margin

= ($600 + $1,000) / $0.40

= 4,000 miles

4. Contribution income statement-

4B. Degree of opearting leverage = Contribution margin / Net operating income

= $720 / $120 = 6

Amount ($) Sales ($0.75 * 1,800) 1,350 Less: Variable cost ($0.35 * 1,800) 630 Contribution margin 720 Less: Fixed costs 600 Net Operating income 120

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