Question

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

Answer 1

Get the gross margin percentage of cost and multiply it to the new unit cost to get maintain the same gross margin percentage of cost.

Units Selling Price : 2.50
Unit Cost - 1.00
Profit Margin : 1.50

Gross profit margin % on sales: 1.50 / 2.50 = 0.60 x 100% = 60%
Gross profit margin % on cost : 1.50 / 1.00 = 1.50 x 100% = 150%

If the cost increase by $0.25
Unit cost : 1.00 + 0.25 = 1.25

1.25 * 150% = 1.875 gross margin.

Gross margin + Unit Cost = Unit Price
1.875 + 1.25 = 3.125

Gross margin % on sales : 1.875 / 3.125 = 0.60 x 100% = 60%
Gross margin % on cost : 1.875 / 1.25 = 1.50 x 100% = 150%