This is the suggested answer to the Profit and Loss Statement exercise on Colorado Ricardo Mountain Bikes.
Revenue
4,000 bikes x $1,200 = $4,800,000.
Cost of Goods Sold and Gross Profit
4,000 bikes x $700 variable cost = $2,800,000 cost of goods sold. Gross profit: $4,800,000 – $2,800,000 = $2,000,000.
Operating Expenses and Operating Profit
Fixed costs of $1,800,000 (factory rent, salaries, admin) are deducted from gross profit: $2,000,000 – $1,800,000 = $200,000 operating profit.
Key point: a $200,000 profit on $4,800,000 of revenue is a thin 4.2% margin – it shows why three years of declining unit sales is dangerous even before the business becomes unprofitable: fixed costs of $1,800,000 do not fall just because fewer bikes are sold, so profit erodes faster than revenue does.
This thin margin is exactly what the Contribution Analysis exercise examines in more detail, by working out how close Colorado Ricardo now sits to its break-even point.
