Question

Lucy works for an adventure sports company, Outdoor Adventures. The company runs ski and snowboard helicopter trips in the winter and whitewater raft trips in the summer. The company has determined that transportation costs are a mixed cost that can be estimated based on the number of miles driven each month. Data from the previous 6 months are as follows:

Month	Miles Driven	Total Cost
January	2,400	$ 1,200
February	2,300	$ 1,100
March	2,150	$1,038
April	1,800	$  930
May	1,850	$ 963
June	2,275	$ 1,069

Required:

1. Using the High Low Method, calculate for the transportation costs:

   1. The variable cost per mile

   2. The fixed cost.

   3. Write the cost formula for calculating total overhead costs given this cost/driver relationship.

2. Prepare a Contribution Format Income Statement (you do not need the header) given the following information.

   • Sales Revenue ..........................................................................   $340,000

   • All variable costs except transportation costs ..........................   $160,000

   • All fixed costs except transportation ........................................ $ 70,000

   • Miles traveled in month of statement ........................................   2,200 miles

Answer 1

		Miles Driven	Total Cost
	High Level	2400	1200
	Low Level	1800	930
	Differential	600	270
	Variable Cost Per Mile	0.45
	(270/600)
		Total Cost
	Cost at High Level	1,200
	Less: Variable Cost	1,080	(0.45*2400)
	Fixed Cost	120
	Cost Equation is Y=0.45X+120
	Contribution Format Income Statement
	Sales Revenue	340,000
	Less: All Variable Cost Excl Transportation	160,000
	Variable Transportation (0.45*2200)	990
	Contribution Margin	179,010
	Less: All Fixed Cost Excl Transportation	70,000
	Fixed Transportation Cost	120
	Net Operating Income	108,890