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Breakeven is 2,400 units a month and the unit contribution margin is $50. Monthly sales are expected to reach 4,300 units. What is the operating income?
A$50,000
B$120,000
C$95,000
D$215,000
Answer & Solution
Correct answer: C. $95,000
1. The first 2,400 units sold pay off the whole of the fixed costs, leaving no profit.
2. Every unit sold beyond breakeven contributes its full margin of $50 to operating income.
3. Units above breakeven are 4,300 minus 2,400, which is 1,900 units.
4. 1,900 units times $50 gives operating income of $95,000.
5. $215,000 comes from costing all 4,300 units at $50 and forgetting that the first 2,400 covered fixed costs.
6. $120,000 is the fixed cost figure, which is recovered rather than earned.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 5.3.1 Interpreting the Breakeven Result_
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