Rodgers, inc. has fixed operating expense of $2 million and will break even with sales of $5 million. For sales of $7 million, an analyst would estimate the firm’s operating income as: A:$800,000 B:$1,200,000 C:$2,000,000

Another way to look at it is that $2 million of the $5 million, or 40%, covers the fixed costs, and 60% covers the variable costs.

After the fixed costs are covered, 60% of sales still covers variable costs, but the 40% is now operating income. Forty percent of the extra $2 million ($7 million − $5 million) is $800,000.