Question

Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.50 per mile driven. Joyce has determined that if she drives 3,300 miles in a month, her total operating cost is $875. If she drives 4,400 miles in a month, her total operating cost is $1,095.

Required:
1. Using the high-low method, determine Joyce's variable and fixed operating cost components.
2. Complete the contribution margin income statement for Joyce's service assuming she drove 3,700 miles last month. (Assume this falls within the relevant range of operations).

Answer 1

Variable operating cost per mile = $0.2

Fixed operating cost = $215

Income at 3,700 miles = $895

Step-by-step explanation:

The variable cost per mile =

(cost at high activity - cost at low activity)/(high activity - low activity)

Fixed operating cost = cost at high activity - (VC/mile × high activity)

So we can apply the formulae as follows:

The variable cost per mile = (1,095 - 875)/(4,400-3,300)= $0.2 per mile

Fixed cost = $1,095 - (0.2×4,400)=$215

Variable operating cost per mile = $0.2

Fixed operating cost = $215

Contribution margin income statement

$

Sales value = (3,700 miles × $0.50 per mile) 1,850

Variable cost (3,700× $0.2) (740)

Contribution 1,110

Less Fixed cost (215)

Income 895