Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.
ID: 2581525 • Letter: J
Question
Joyce Murphy runs a courier service in downtown Seattle. She charges clients $0.56 per mile driven. Joyce has determined that if she drives 2,550 miles in a month, her total operating cost is $775. If she drives 3,650 miles in a month, her total operating cost is $951.
Required:
1. Using the high-low method, determine Joyce’s variable and fixed operating cost components. (Round your cost per unit answer to 2 decimal places.)
2. Complete the contribution margin income statement for Joyce’s service assuming she drove 1,700 miles last month. (Assume this falls within the relevant range of operations).
Explanation / Answer
Answer:- 1)- High-Low Method:-
Variable Cost per Unit
Variable cost per unit (b) is calculated using the following formula:
Variable Cost per Unit =Y2-Y1/X2-X1
Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/labor hours/machine hours etc. at highest level of activity; and
x1 are the number of units/labor hours/machine hours etc. at lowest level of activity
The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).
Total Fixed Cost
Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:
Total Fixed Cost = y2 bx2 = y1 bx1
We have,
at highest activity: x2 = 3650; y2 = $951
at lowest activity: x1 = 2550; y1 = $775
Variable Cost per mile driven = ($951 $775) ÷ (3650 2550)
= $176/1100 miles =$.16 per mile
Total Fixed Cost = $951 ($.16 × 3650) = $951 – $584 =$367
2)-
Variable Cost per Unit =Y2-Y1/X2-X1
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