Final answer:
Whether Kramer should increase the price in 2016 depends on the price elasticity of demand. If demand is elastic, an increase might result in lower total revenue. However, if demand is inelastic, increasing the price may lead to higher total revenue and could be beneficial.
Step-by-step explanation:
The decision on whether Kramer should increase the selling price in 2016 is dependent on several factors, including price elasticity of demand and its impact on operating income, sales revenue, sales volume, and gross margin.
If the price elasticity of demand is greater than 1, meaning the product is elastic, a price increase would result in a decrease in total revenue as the percentage decrease in quantity demanded will be greater than the percentage increase in price. In this case, it would not be advisable for Kramer to increase the selling price since doing so could lead to a decrease in total revenue and potentially operating income, despite the increase in unit price.
Conversely, if the price elasticity of demand is less than 1, meaning the product is inelastic, a price increase could result in an increase in total revenue because the percentage decrease in quantity demanded will be less than the percentage increase in price. Here, it might be beneficial for Kramer to increase the price, particularly if the goal is to increase operating income and the sales volume drop does not lead to a decrease in gross margin.