Question

Galose Coffee Company sold 7,000 units in October at a sales price of $45 per unit. The variable cost is $20 per unit. The monthly fixed costs are $8,000. What is the operating income earned in October?

A) $175,000
B) $315,000
C) $167,000
D) $140,000

Answer 1

The operating income for Galose Coffee Company in October is found by calculating the contribution margin and then subtracting the monthly fixed costs, resulting in an operating income of $167,000.

Step-by-step explanation:

To calculate the operating income for Galose Coffee Company in October, an income statement approach will be used. Operating income is found by subtracting both variable costs and fixed costs from total revenues.

The total revenue is calculated by multiplying the number of units sold by the sales price per unit. Therefore, total revenue equals 7,000 units * $45/unit, or $315,000. The total variable cost is the number of units multiplied by the variable cost per unit, which is 7,000 units * $20/unit, totaling $140,000. After subtracting the total variable cost from the total revenue, we get the contribution margin, which is $175,000 ($315,000 - $140,000).

To find the operating income, we then subtract the monthly fixed costs from the contribution margin, resulting in an operating income of $167,000 ($175,000 - $8,000), which corresponds to option C).