Problem

Russell Preston delivers parts for several local auto parts stores. He charges clients 0.75 per mile driven. Russell has determined that if he drives 2,400 miles in a month, his average operating cost is $0.60 per mile. If he drives 3,400 miles in a month, his average operating cost is $0.55 per mile. Russell has used the high-low method to determine that his monthly cost equation is: total cost = $640.00 + $0.43 per mile.

Required:

1. Determine how many miles Russell needs to drive to break even.

2. Assume Russell drove 2,500 miles last month. Without making any additional calculations, determine whether he earned a profit or a loss last month.

3. Determine how many miles Russell must drive to earn $1,600.00 in profit.

4-a. Prepare a contribution margin income statement assuming Russell drove 2,500 miles last month.

4-b. Use the above information to calculate Russell's degree of operating leverage.