ABC Co. has fixed costs of $50,000 (with 60% attributable to manufacturing overhead)and breakeven sales of $500,000. What is its projected gross margin at $1,000,000 in sales?

Question

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First, we need to calculate the variable costs as a percentage of sales to determine the contribution margin. To do this, we can use the formula:

Contribution Margin = (Sales - Variable Costs) / Sales

Let's assume that the variable costs are 40% of sales. This means that the contribution margin is:

Contribution Margin = (1 - 0.4) = 0.6 or 60%

Next, we can use the formula for breakeven sales to find the total costs:

Breakeven Sales = Fixed Costs / Contribution Margin

$500,000 = $50,000 / 0.6

Total Costs = $83,333.33

Now we can use the same formula to find the total costs at $1,000,000 in sales:

$1,000,000 = Fixed Costs / Contribution Margin + Variable Costs

$1,000,000 = $50,000 / 0.6 + 0.4 * $1,000,000

$1,000,000 = $83,333.33 + $400,000

Total Costs = $483,333.33

Finally, we can calculate the gross margin:

Gross Margin = Sales - Total Costs

Gross Margin = $1,000,000 - $483,333.33

Gross Margin = $516,666.67

Therefore, the answer is C) $70,000.

ABC Co Has Fixed Costs of $50,000 (With 60% Attributable to to Manufacturing