PA6-2 (Algo) Analyzing Break-Even Point, Setting Target Profit, Degree of Operating Leverage [LO 6-1, 6-2, 6-5]

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 3,700 miles in a month, his average operating cost is $0.70 per mile. If he drives 5,700 miles in a month, his average operating cost is $0.50 per mile. Russell has used the high-low method to determine that his monthly cost equation is total cost = $1,085 + $0.13 per mile.

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

2. Assume Russell drove 2,000 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 $2,015 in profit.

4-a. Prepare a contribution margin income statement assuming Russell drove 2,000 miles last month.

4-b. Use the information provided in Req 4a to calculate Russells degree of operating leverage.