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.

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 earned a profit or a loss last month.
3. Determine how many miles Russell must drive to earn $1,000 in profit.

Answer 1

Russell Preston

1. The miles Russell needs to drive to break even is:

= 1,500 miles.

2. If Russel drove 1,800 miles last month, he earned a profit.

3. To earn a profit of $1,000, the miles Russell must drive are:

= 4,000 miles

Step-by-step explanation:

a) Data and Calculations:

Selling price per mile driven = $0.75

Average operating cost for driving 3,000 miles = $0.55 per mile

Total operating cost for 3,000 miles = $1,650 ($3,000 * $0.55)

Average operating cost for driving 4,000 miles = $0.50 per mile

Total operating for 4,000 miles = $2,000 (4,000 * $0.50)

Total cost function = $600 + $0.35 per mile using the high-low method

Variable cost per mile = $0.35

Fixed cost per month = $600

Contribution margin per mile = $0.40 ($0.75 - $0.35)

Contribution margin ratio = 0.5333

To break-even, Russel must drive = $600/$0.40 = 1,500 miles

At this mileage, his total costs = $1,125 ($600 + $0.35 * 1,500)

At this mileage, his total revenue = $1,125 ($0.75 * 1,500)

To earn a profit of $1,000, Russell must drive = ($600 + $1,000)/$0.40

= 4,000 miles