Chapter 6, Problem 8E

Analyzing Break-Even Point, Preparing CVP Graph, Calculating Degree of Operating Leverage, Predicting Effect of Price Structure Changes
Joyce Murphy runs a courier service in downtown Seattle. She charges cheats $0.50 per mile driven. Joyce has determined that if she drives 3,300 miles in a month, her total operation cost is $875. If she drives 4,400 miles in a month, her total operating cost is $1,095. Joyce has used the high-low method (covered in Chapter 5) to determine that her monthly cost equation is total monthly cost - $215 + $0.20 per mile driven.
1. Determine how many miles Joyce needs to drive to break even.
2. Calculate Joyce degree of operating leverage if she drives 4,200 miles.
3. Suppose Joyce took a week off and her sales for the month decreased by 23 percent. Using the degree of operating leverage, calculate the effect this will have on her profit for that month.