A firm operated at 90% of capacity for the past year, during which fixed costs were $420,000, variable costs were 40% of sales, and sales were $1,000,000. Operating profit was
A) $180,000
B) $420,000
C) $1,080,000
D) $980,000

Question

Quizplus · Accepted Answer

First, we need to find the total variable cost:
Total variable cost = 40% of $1,000,000
Total variable cost = $400,000

Next, we can find the contribution margin:
Contribution margin = Sales - Total variable cost
Contribution margin = $1,000,000 - $400,000
Contribution margin = $600,000

Now we can calculate the break-even point:
Break-even point = Fixed costs / Contribution margin
Break-even point = $420,000 / $600,000
Break-even point = 0.7 or 70%

Since the firm operated at 90% of capacity, their sales were above the break-even point. We can use the following formula to calculate operating profit:

Operating profit = (Sales - Total variable cost) - Fixed costs
Operating profit = ($1,000,000 - $400,000) - $420,000
Operating profit = $180,000

Therefore, the answer is A) $180,000.

A Firm Operated at 90% of Capacity for the Past