Question

Russell Preston delivers parts for several local auto parts stores. He charges clients $1.45 per mile driven. Russell has determined that if he drives 2,700 miles in a month, his average operating cost is $0.90 per mile. If he drives 3,700 miles in a month, his average operating cost is $0.80 per mile. Russell has used the high-low method to determine that his monthly cost equation is total cost = $1,380 + $0.53 per mile.

Required:
1. Determine how many miles Russell needs to drive to break even.

2. Assume Russell drove 2,000 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 $1,840 in profit.

4-a. Prepare a contribution margin income statement assuming Russell drove 2,000 miles last month.

4-b. Use the information provided in Req 4a to calculate Russell’s degree of operating leverage.

Answer 1