Question

Advanced enterprises reports yearminusend information from 2018 as​ follows: sales​ (160,250 units) ​$968,000 cost of goods sold ​641,000 gross margin ​327,000 operating expenses ​263,000 operating income ​$64,000 advanced is developing the 2019 budget. in 2019 the company would like to increase selling prices by​ 14.5%, and as a result expects a decrease in sales volume of​ 9%. all other operating expenses are expected to remain constant. assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. should advanced increase the selling price in​ 2019?

Answer 1

Advanced enterprises should increase the selling price because it will have greater Operating Income.

The sales volume will decrease to 145,827.5 (160,250 x (1 - 0.09)) because of increase in price to $6.92 ((968,000/160,250) x 1.1450). Since Cost of Goods Sold is variable at $4 per unit, Gross Margin is $2.92 per unit.

Operating Income is then computed as follows:

Gross Margin (145,827.5 × $2.92) $425,816.30
Less: Operating Expenses 263,000
Operating Income 162,816.30

Thus, it is recommended that Advanced Enterprise increase their selling price because it will yield higher Operating Income.