Question

Answer the following​ question(s) using the information below.

Fresno Home Oil Services wants to determine a fuel surcharge to add to its​ customers' bills based on the number of miles driven to each area. It wants to separate the fixed and variable portion of the​ truck's operating costs so it has a better idea of how distance affects these costs. Fresno Home Oil Services has the following data available.

Month	Miles driven	Total operating costs
January	​15,900	​$9,000
February	​17,300	​$9,860
March	​14,500	​$8,600
April	​16,100	​$8,800
May	​17,100	​$8,600
June	​15,500	​$8,100

Fresno Home Oil Services uses the

high−low

method to determine its operating cost equation and earns​ $0.50 per mile for​ 18,000 miles.

What would​ Fresno's operating income​ (loss) be for a month if the company prepared a traditional income statement for a​ month?

Answer 1

Variable cost per mile = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (9,860 - 8,600)/(​17,300 - 14,500)

= 1,260/2,800

= $0.45

Monthly Fixed cost = Highest activity cost - (Highest activity x Variable cost per mile)

= 9,860 - (17,300 x 0.45)

= 9,860 - 7,785

= $2,075

Total operating cost = Fixed cost + Variable cost per miles x Number of miles

= 2,075 + 0.45X

For 18,000 miles driven, total operating cost would be = 2,075 + 0.45X

= 2,075 + 0.45 x 18,000

= 2,075 + 8,100

= $10,175

Income statement

Sales revenue (18,000 x 0.50)	9,000
total operating cost	- 10,175
operating loss	- $1,175