The following data have been provided by a retailer that sells a single product:
$\begin{array}{|l|r|r|}
\hline & \text { This Year } & \text { Last Year } \
\hline \text { Units Sold } & 200,000 & 150,000 \
\hline \text { Sales Revenue } & \$ 1,000,000 & \$ 1750,000 \
\hline \text { Less: Cost of Goods Sold } & \underline{700,000} & \underline{\mathbf{5 2 5 , 0 0 0}} \
\hline \text { Gross Margin } & 300,000 & 225,000 \
\hline \text { Less: Operating Expenses } & \underline{222,000} & \underline{\mathbf{2 1 0 , 0 0 0}} \
\hline \text { Operating Income } & \underline{\$ 78,000} & \underline{\$ 15,000} \
\hline
\end{array}$

-What is the best estimate of the company's total fixed operating expenses per year?
A) $0.
B) $44,000.
C) $80,000.
D) $174,000.

Question

The following data have been provided by a retailer that sells a single product:
$\begin{array}{|l|r|r|}
\hline & \text { This Year } & \text { Last Year } \
\hline \text { Units Sold } & 200,000 & 150,000 \
\hline \text { Sales Revenue } & \$ 1,000,000 & \$ 1750,000 \
\hline \text { Less: Cost of Goods Sold } & \underline{700,000} & \underline{\mathbf{5 2 5 , 0 0 0}} \
\hline \text { Gross Margin } & 300,000 & 225,000 \
\hline \text { Less: Operating Expenses } & \underline{222,000} & \underline{\mathbf{2 1 0 , 0 0 0}} \
\hline \text { Operating Income } & \underline{\$ 78,000} & \underline{\$ 15,000} \
\hline
\end{array}$

-What is the best estimate of the company's total fixed operating expenses per year?
A) $0.
B) $44,000.
C) $80,000.
D) $174,000.

Quizplus · Accepted Answer

Fixed operating expenses are costs that do not change with the level of production or sales. To estimate the fixed operating expenses, we can look at the change in operating income and the change in gross margin. The operating income increased by $63,000 ($78,000 - $15,000) from last year to this year, while the gross margin increased by $75,000 ($300,000 - $225,000). The difference between the increase in gross margin and the increase in operating income is $12,000 ($75,000 - $63,000), which represents the increase in variable operating expenses due to the increase in units sold (50,000 units). Since the operating expenses increased by $12,000 when sales increased by 50,000 units, the variable operating expense per unit is $0.24 ($12,000 / 50,000 units). To find the fixed operating expenses, we subtract the variable portion from the total operating expenses for any given year. For example, this year's total operating expenses are $222,000, and the variable portion for 200,000 units sold is $48,000 (200,000 units * $0.24 per unit). Subtracting the variable portion from the total gives us $174,000 ($222,000 - $48,000) as the fixed operating expenses.

The Following Data Have Been Provided by a Retailer That