Fresno Home Oil Services wants to determine a fuel surcharge to add to its customers' bills based on the number of miles driven to each area.It wants to separate the fixed and variable portion of the truck's operating costs so it has a better idea of how distance affects these costs.Fresno Home Oil Services has the following data available. $$\begin{array} { | l | c | c | }
\hline \text { Month } & \text { Miles driven } & \text { Total operating costs } \
\hline \text { January } & 15,900 & \$ 9,000 \
\hline \text { February } & 17,300 & \$ 9,860 \
\hline \text { March } & 14,500 & \$ 8,600 \
\hline \text { April } & 16,100 & \$ 8,800 \
\hline \text { May } & 17,100 & \$ 8,600 \
\hline \text { June } & 15,500 & \$ 8,100 \
\hline
\end{array}$$ Assume Fresno Home Oil Services uses the high-low method to determine its operating cost equation and earns $0.50 per mile for 18,000 miles.
-What would its contribution margin be for a month if Fresno Home Oil Services prepared a contribution margin income statement for the month?

Question

Fresno Home Oil Services wants to determine a fuel surcharge to add to its customers' bills based on the number of miles driven to each area.It wants to separate the fixed and variable portion of the truck's operating costs so it has a better idea of how distance affects these costs.Fresno Home Oil Services has the following data available. $$\begin{array} { | l | c | c | } 
\hline \text { Month } & \text { Miles driven } & \text { Total operating costs } \
\hline \text { January } & 15,900 & \$ 9,000 \
\hline \text { February } & 17,300 & \$ 9,860 \
\hline \text { March } & 14,500 & \$ 8,600 \
\hline \text { April } & 16,100 & \$ 8,800 \
\hline \text { May } & 17,100 & \$ 8,600 \
\hline \text { June } & 15,500 & \$ 8,100 \
\hline
\end{array}$$ Assume Fresno Home Oil Services uses the high-low method to determine its operating cost equation and earns $0.50 per mile for 18,000 miles.
-What would its contribution margin be for a month if Fresno Home Oil Services prepared a contribution margin income statement for the month?

Quizplus · Accepted Answer

The contribution margin is the difference between the revenue and the variable costs. The revenue is $0.50 per mile for 18,000 miles, which is $9,000. The variable costs are the operating costs that vary with the number of miles driven. The high-low method is used to determine the variable cost per mile. The highest and lowest miles driven are 17,300 and 14,500, respectively. The highest and lowest operating costs are $9,860 and $8,600, respectively. The variable cost per mile is ($9,860 - $8,600) / (17,300 - 14,500) = $0.10 per mile. The variable costs for 18,000 miles are $0.10 per mile * 18,000 miles = $1,800. The contribution margin is $9,000 - $1,800 = $7,200.

Fresno Home Oil Services Wants to Determine a Fuel Surcharge