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.

Answer 1

Answer:

1. 1,500 miles

2. Profit

3.4,000 miles

Explanation:

1. Calculation to Determine how many miles Russell needs to drive to break even k-Even Miles

First step is to calculate the Unit contribution margin

Using this formula

Let plug in the formula

Unit contribution margin = Sales price – Variable cost per unit

Unit contribution margin= $0.75 per mile – $0.35 per mile

Unit contribution margin= $0.40 per mile

Now let determine the Break-even units using this formula

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

Let plug in the formula

Break-even units= $600 / $0.40

Break-even units= 1,500 miles

Therefore how many miles Russell needs to drive to break even k-Even Miles will be 1,500 miles

2. Calculation to determine whether he earned a profit or a loss last month Assume Russell drove 1,800 miles last month

Profit=1,800 miles – 1,500 miles

Profit=300 miles

Therefore Assume Russell drove 1,800 miles last month he will EARNED A PROFIT last month

3. Calculation to determine how many miles Russell must drive to earn $1,000 in profit.

Using this formula

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

Let plug in the formula

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

Target units = 4,000 miles

Therefore how many miles Russell must drive to earn $1,000 in profit will be 4,000 miles