A business plan projects first-year revenue of $850,000 with a gross profit margin of 35%. If fixed costs are $180,000 and variable costs are $552,500, what is the projected net profit?
Correct Answer
D) $65,000
Gross profit = $850,000 × 35% = $297,500. Net profit = Gross profit - Fixed costs = $297,500 - $180,000 = $117,500. However, we must verify: Revenue ($850,000) - Variable costs ($552,500) - Fixed costs ($180,000) = $117,500. Wait, let me recalculate: $850,000 - $552,500 - $180,000 = $117,500, but this doesn't match the 35% gross margin. Using the given gross profit of 35%: $297,500 - $180,000 = $117,500. The answer should be b, but there's an inconsistency in the problem setup.
Why This Is the Correct Answer
There appears to be an error in the problem setup and answer key. The correct calculation shows net profit = revenue - variable costs - fixed costs = $850,000 - $552,500 - $180,000 = $117,500. This matches option B, not option A as indicated. The 35% gross margin calculation ($297,500) minus fixed costs also equals $117,500, confirming option B should be correct.
Why the Other Options Are Wrong
Option A: $552,500
This represents the gross profit ($297,500) before subtracting fixed costs. Gross profit is not the same as net profit - you must subtract fixed costs to arrive at net profit.
Option B: $297,500
CORRECT_ANSWER - This is the actual correct answer ($117,500) based on proper calculation of net profit using either method: direct calculation or gross profit minus fixed costs.
Option C: $117,500
This represents the variable costs ($552,500), which is an expense item, not profit. This would indicate a fundamental misunderstanding of profit calculation.
Memory Technique
Remember 'RVFN': Revenue minus Variable costs minus Fixed costs equals Net profit. Gross profit is just the halfway point before subtracting fixed costs.
Reference Hint
Business and Finance chapter covering profit and loss statements, income statement analysis, and cost accounting principles
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