Question

Charley Davison Inc. produced 10,000 motorcycles last year and sold 9,000 of them each for $18,000/bike. Variable cost was $13,000/bike. Fixed cost was $25 million and it had no debt. Assume no profits tax. It paid out all profits as dividends. Which of the following are true?
a. Profits = $20 million
b. Profits = $25 milion
c. Piotits-513 million loss)
d. Change in cash= -S20 million
e. Change in cash= -$25 million
f. Change in cash =- $13 million

Answer 1

Answer:

a. Profits = $20 million

Explanation:

The computation is shown below

Total revenue is

= Number of bikes sold × sale price of a bike

= 9,000 × 18,000

= $162,000,000

Total costs = fixed costs + variable costs

where,  

Fixed costs = $25 million or $25,000,000.

And,

The Variable cost for the bikes sold is

= number of bikes sold × variable cost per bike

= 9000 × 13000

= $117,000,000

So, the total costs is

= $25,000,000 + $117,000,000

= $142,000,000

Now  

Profit = total revenue - total cost

= $162,000,000 - $142,000,000

= $20,000,000

Hence, the correct option is a.