Cost-volume-profit analysis

Cost-volume-profit analysis can also be used in making personal financial
decisions. For example, the purchase of a new car is one of your biggest personal expenditures. It is important that you carefully analyze your options.

Suppose that you are considering the purchase of a hybrid vehicle. Let’s assume the following facts. The hybrid will initially cost an additional $3,780 above the cost of a traditional vehicle. The hybrid will get 50 miles per gallon of gas, and the traditional car will get 40 miles per gallon. Also, assume that the cost of gas is $3.60 per gallon.

Using the facts above, answer the following question.
What is the variable gasoline cost of going one mile in the hybrid car? What is the variable cost of going one mile in the traditional car? (Round answers to 2 decimal places, e.g. 0.25.)

Hybrid car
Traditional car
Variable gasoline cost for both in $$

Using the information in above part, if “miles” is your unit of measure, what is the “contribution margin” of the hybrid vehicle relative to the traditional vehicle? That is, express the variable cost savings on a per-mile basis. (Round answer to 2 decimal places, e.g. 0.25.)

The savings per mile in $

How many miles would you have to drive in order to break even on your investment in the hybrid car?

Sample Solution