The Gillett Company's breakeven point in units is 25,000.Assuming that variable costs are 50% and fixed costs are $500,000,what is the company's projected operating income if sales are $1,250,000?

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:
Contribution Margin per unit = Sales price per unit - Variable cost per unit
Since variable costs are 50% of sales, the variable cost per unit is 0.5 times the sales price per unit:
Variable cost per unit = 0.5 x Sales price per unit
So, Contribution Margin per unit = Sales price per unit - 0.5 x Sales price per unit = 0.5 x Sales price per unit

Next, we can use the breakeven point formula to find the sales price per unit:
Breakeven point in units = Fixed costs / Contribution Margin per unit
25,000 = $500,000 / Contribution Margin per unit

Therefore, Contribution Margin per unit = $500,000 / 25,000 = $20

Using this Contribution Margin per unit, we can find the operating income using the following formula:
Operating Income = (Sales - Variable costs) - Fixed costs
Operating Income = (25,000 x Sales price per unit - 0.5 x 25,000 x Sales price per unit) - $500,000
Operating Income = 0.5 x 25,000 x Sales price per unit - $500,000

Given that sales are $1,250,000:
Operating Income = 0.5 x 25,000 x ($1,250,000 / 25,000) - $500,000
Operating Income = 0.5 x $1,250,000 - $500,000
Operating Income = $625,000 - $500,000
Operating Income = $125,000

Therefore, the best choice is C, $125,000, as it represents the company's projected operating income.

The Gillett Company's Breakeven Point in Units Is 25,000