Question

Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.60 per mile driven. Joyce has determined that if she drives 2,250 miles in a month, her total operating cost is $625. If she drives 3,350 miles in a month, her total operating cost is $845.

Answer 1

Explanation:

The computation of the fixed cost and the variable cost per hour by using high low method is shown below:

Variable cost per mile = (High Operating cost - low operating cost) ÷ (High miles - low miles)

= ($845 - $625) ÷ (3,350 miles - 2,250 miles)

= $220 ÷ 1,100 miles

= $0.2 per miles

Now the fixed cost equal to

= High operating cost - (High miles × Variable cost per miles)

= $845 - (3,350 miles × $0.2 per miles)

= $845 - $670

= $175

And, the contribution margin income statement is presented below:

Sales (1,400 × $0.6)                                         $840

Less: Variable cost (1,400 × $0.2)                ($280)

Contribution margin                                        $560

Less: Fixed cost                                               ($175)

Net  operating income                                    $385