Final answer:
A sharp decrease in gross profit percentage can indeed be an indicator of trouble, suggesting rising costs or falling prices. Additionally, increased prices with decreased sales volume can lead to lower total revenue. Competition can further erode profits and impact both the business and its employees.
Step-by-step explanation:
A sharp decrease in the gross profit percentage is indeed a potential indicator of trouble for a business. This percentage calculates the proportion of money left over from revenues after accounting for the cost of goods sold. When the gross profit percentage decreases significantly, it may suggest that costs are rising, prices are falling, or a combination of both. It is critical for a business to understand this because gross profit is what covers operating expenses and generates profit for the company.
If a product's price (P) increases and the quantity sold (Q) decreases, this may not always lead to increased revenue. A given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P x Q) falls. Effectively, if the price increase leads to a proportionally larger drop in sales volume, overall revenue could decrease.
Furthermore, competition can have a profound impact on a firm's profitability. Competition from companies offering better or cheaper products can lead to a reduction in both price (P) and quantity (Q) sold, thereby diminishing gross profit and potentially forcing the business to downscale or cease operations entirely. The adverse effects extend to workers who may experience loss of income or jobs.