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Projection 1 gives a contribution margin of $375,000 and Projection 6 gives $401,500. Fixed costs are $375,000. What operating income does Projection 6 yield?
A$16,500
B$26,500
C$401,500
D$375,000
Answer & Solution
Correct answer: B. $26,500
1. Operating income is contribution margin minus total fixed costs.
2. Projection 6 gives $401,500 minus $375,000, which is $26,500.
3. Projection 1 gives $375,000 minus $375,000, which is exactly zero, so it merely breaks even.
4. Projection 1 carries the better ratio at 46.9% against 44.0%, yet it earns nothing.
5. A ratio judged on its own can mislead, because fixed costs are paid out of margin in money rather than in percentages.
6. $401,500 is the contribution margin itself, which is the figure before fixed costs are charged.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 6.6 Contribution Margin Analysis_
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