If forecasted sales next year are $1,000,000, gross margin is 25%, and operating expenses are 15% of sales, what is forecasted operating income?

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Multiple Choice

If forecasted sales next year are $1,000,000, gross margin is 25%, and operating expenses are 15% of sales, what is forecasted operating income?

Explanation:
The key idea is to derive operating income by applying gross margin and operating expenses to forecasted sales. Gross margin of 25% means gross profit is 0.25 × 1,000,000 = 250,000. Operating expenses are 15% of sales, which is 0.15 × 1,000,000 = 150,000. Subtracting expenses from gross profit gives operating income: 250,000 − 150,000 = 100,000. So the forecasted operating income is $100,000.

The key idea is to derive operating income by applying gross margin and operating expenses to forecasted sales. Gross margin of 25% means gross profit is 0.25 × 1,000,000 = 250,000. Operating expenses are 15% of sales, which is 0.15 × 1,000,000 = 150,000. Subtracting expenses from gross profit gives operating income: 250,000 − 150,000 = 100,000. So the forecasted operating income is $100,000.

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