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.
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).

Answer 1

Answer:

Variable cost=Total cost at higher activity-Total cost at lower activity/(Volume at higher activity-Volume at lower activity

variable cost=$951-$775/(3650-2550)

                    =$0.16

Fixed cost=Total cost at an activity level-Variable cost at that activity level

                 =$951-(3650*$0.16)

                 =$367

Contribution income statement

 Revenue 1700*$0.56=$952

  Variable cost 1700*$0.16=$272

  Contribution margin=$680

  less Fixed cost         =$367

  Profit                          =$313

Explanation:

The high and low method is by using the higher level of activity total

costs and volume with lower level activity total costs and volume as indicated above.

I went further to calculate the margin for 1700 miles as well as the final profit figure.