Question

Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.58 per mile driven. Joyce has determined that if she drives 3,500 miles in a month, her total operating cost is $980. If she drives 5,200 miles in a month, her total operating cost is $1,235. Joyce has used the high-low method to determine that her monthly cost equation is total monthly cost = $455 + $0.15 per mile driven.

Required: 1. Determine how many miles Joyce needs to drive to break even.

2. Calculate Joyce’s degree of operating leverage if she drives 5,400 miles.

3. Suppose Joyce took a week off and her sales for the month decreased by 25 percent. Using the degree of operating leverage, calculate the effect this will have on her profit for that month.

Answer 1

	Required 1
	Break-even units		1058	Miles
	( fixed cost/contribution margin per mile)
	455/	(.58-.15)
	455/	0.43
	1058
	Required 2
	Degree of operating leverage			1.2437
	contribution margin		(5400*.43)=		2322
	less fixed cost				455
	Net income				1867
	Degree of operating leverage=			contribution margin/net income
				2322/1867
				1.2437
	Required 3
	Effect on Profit		Decrease	31.09266	%
	(round the answers if required)