Sportstuff, Inc. is investigating the feasibility of adding a new skateboard to its line-up of products. The marketing department believes that 10,000 units can be sold at $90 each. Sportstuff requires a 25% profit margin (i.e. cost is 75% of selling price) on all products.
If it achieves its goal, Sportstuff will have operating income on this product of:

Question

Quizplus · Accepted Answer

Operating income is calculated as sales minus costs. With a selling price of $90 and a required profit margin of 25%, the cost is 75% of $90, which is $67.50 per unit. For 10,000 units, total cost is $675,000 (10,000 * $67.50). Total sales are $900,000 (10,000 * $90). Operating income is sales minus costs, so $900,000 - $675,000 = $225,000.