Question

Bethany Link delivers parts for several local auto parts stores. She charges clients $2.60 per mile driven. She has determined that if she drives 2,500 miles in a month, her average operating cost is $2.40 per mile. If Bethany drives 5,000 miles in a month, her average operating cost is $2.00 per mile. Required: 1. Using the high-low method, determine Bethany’s variable and fixed operating cost components. 2. Complete the contribution margin income statement for the business last month, when Bethany drove 2,750 miles. (Assume this falls within the relevant range of operations).

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

She charges clients $2.60 per mile driven. She has determined that if she drives 2,500 miles in a month, her average operating cost is $2.40 per mile. If Bethany drives 5,000 miles in a month, her average operating cost is $2.00 per mile.

1) To calculate the variable and fixed cost, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (10,000 - 6,000) / (5,000 - 2,500)= $1.6

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 10,000 - (1.6*5,000)= $2,000

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 6,000 - (1.6*2,500)= $2,000

2) Income statement:

Sales= 2,750*2.6= 7,150

Variable cost= 2,750*1.6= (4,400)

Contribution margin= 2,750

Fixed costs= (2,000)

Net operating income= 750