CSTR sample assessment 2 task 6

Hi BethG,

Please see the workings below:

Q1 - Sales Revenue per mile for the contract of 14,000 miles

A1 - I guess this one is pretty straight forward as everything is given:

Sales Revenue: 182,000 / Miles: 14,000 = 13 per mile


Q2 - The variable cost per mile if the contract is for 18,200 miles

A2 - Variable costs (16,800 +11,200 +15,400) / 14,000 miles = 3.1 per mile

Variable cost per mile remains the same no matter how many miles but the total variable cost increases with output (miles in this case)
So the variable cost per mile is 3.1 for 18,200 miles but the total of variable cost for 18,200 miles would be more since we would need to 18,200 miles x 3.10 = 56,420 - but the question is only asking for variable cost per mile


Q3 - Fixed cost per mile if the contract is for 15,600 miles

A3 - Fixed costs given in the table are: indirect labour and overheads. We need to divide them by number of miles to get a fixed cost per mile

(19,600 +35,000) 54,600 / 15,600 miles = 3.5 per mile

(Fixed cost per mile for 18,200 would be less because as the level of activity increases fixed cost per unit will decrease because it is spread over larger number of miles - 54,600 / 18,200 = 3)


Q4 - The total cost per mile if the contract is 15,600 miles

A4 - We know from A2 that variable cost per mile is 3.1
We also know from A3 that fixed cost per mile for 15,600 miles is 3.5

The total cost per mile for 15,600 miles is then variable cost per mile plus fixed cost per mile: 3.1 + 3.5 = 6.6


Q5 - The profit per mile if the contract is 18,200 miles

A5 - We know that variable cost is 3.1
We can calculate fixed cost per mile for 18,200 miles: 54,600 / 18,200 = 3
Total cost per mile if the contract is for 18,200 miles
3.1 + 3 = 6.1
Sale revenue per mile is 13 (calculated in A1)

Sale revenue per mile minus total cost per mile = profit per mile
13 - 6.1 = 6.9


I hope that make sense