Question

If the unit selling price is $2.50 and the unit cost is $1.00, what action is need to maintain the gross margin percentage when unit cost increases $0.25?*

Answer 1

In order to keep a constant gross margin percentage, you would need to raise the price of the product to $3.13.

In order to find this you must first calculate out the current gross margin percentage. You can find this using the equation below.


`(Cost)/(Price)` = Gross Margin


`(1.00)/(2.50)` = Gross Margin

40% = Gross Margin

Now we need to use the same equation with a new cost to find price.


`(Cost)/(Price)` = Gross Margin


`(1.25)/(Price)` = 40%

1.25/.40 = Price

3.13 = Price

Answer 2

Let

G--------> the gross margin percentage

P-------> unit selling price

C------> the unit cost

we know that

The gross margin percentage is equal to

`G=(C)/(P) *100`

in this problem

P=$
`2.50`

C=$
`1.00`

so

`G=(1.00)/(2.50) *100`

`G=40`%

If the unit cost increases $
`0.25`

the new unit cost is equal to

`C=1.00+0.25\\ C=1.25`

Find the new value of the unit selling price for

C=$
`1.25`

G=
`40`%

`G=(C)/(P) *100\\ \\ P=(C)/(G) *100\\ \\ P=(1.25)/(40) *100\\ \\ P=3.125`

therefore

the answer is

Increases the unit selling price to $
`3.125`