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1,000 units are sold at $25 each, variable cost is $10 per unit and fixed costs are $8,000. What is the operating income?
A$8,000
B$15,000
C$7,000
D$17,000
Answer & Solution
Correct answer: C. $7,000
1. Total sales are 1,000 units times $25, which is $25,000.
2. Total variable costs are 1,000 units times $10, which is $10,000.
3. Total contribution margin is $25,000 minus $10,000, which is $15,000.
4. Fixed costs of $8,000 are then deducted from the contribution margin.
5. $15,000 minus $8,000 gives operating income of $7,000.
6. $15,000 is the contribution margin, which is the figure before fixed costs are taken off.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.2.1 Contribution Margin_
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