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. $$\begin{array} { | l | c | c | }
\hline \text { Month } & \text { Miles driven } & \text { Total operating costs } \
\hline \text { January } & 15,900 & \$ 9,000 \
\hline \text { February } & 17,300 & \$ 9,860 \
\hline \text { March } & 14,500 & \$ 8,600 \
\hline \text { April } & 16,100 & \$ 8,800 \
\hline \text { May } & 17,100 & \$ 8,600 \
\hline \text { June } & 15,500 & \$ 8,100 \
\hline
\end{array}$$ 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 operating income (loss)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. $$\begin{array} { | l | c | c | } 
\hline \text { Month } & \text { Miles driven } & \text { Total operating costs } \
\hline \text { January } & 15,900 & \$ 9,000 \
\hline \text { February } & 17,300 & \$ 9,860 \
\hline \text { March } & 14,500 & \$ 8,600 \
\hline \text { April } & 16,100 & \$ 8,800 \
\hline \text { May } & 17,100 & \$ 8,600 \
\hline \text { June } & 15,500 & \$ 8,100 \
\hline
\end{array}$$ 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 operating income (loss)be for a month if Fresno Home Oil Services prepared a contribution margin income statement for the month?

Quizplus · Accepted Answer

Using the high-low method:
Variable Cost per Mile = (Cost at High Activity Level – Cost at Low Activity Level) / (High Activity Level – Low Activity Level)
Variable Cost per Mile = ($21,000 - $16,800) / (3000 - 2000) = $2.10

Fixed Cost = Total Cost – (Variable Cost per Mile x Total Miles)
Fixed Cost = $16,800 – ($2.10 x 2000) = $12,000

Operating income (loss) = (Revenue - Variable Costs) - Fixed Costs
Operating income (loss) = ($0.50 x 18,000) - ($2.10 x 18,000) - $12,000 = -$1,175 
Therefore, the operating income (loss) for the month is $1,175 in loss. The answer is B.

Fresno Home Oil Services Wants to Determine a Fuel Surcharge