Question

Kramer Enterprises reports year-end information from 2015 as follows: Sales (160,000 units) $960,000 Cost of goods sold 640,000 Gross margin 320,000 Operating expenses 260,000 Operating income $60,000 Kramer is developing the 2016 budget. In 2016 the company would like to increase selling prices by 12.5%, 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. What is budgeted sales for 2016

Answer 1

Budgeted sales for 2016 is $982,800 (145,600 units)

Cost of goods sold: $582,400

Gross margin: $400,400

Operating expenses: $260,000 (fixed cost and remained constant)

Operating income: $140,400

Step-by-step explanation:

In 2015:

Selling prices = $960,000/160,000 = $6

Cost of goods sold per unit = $640,000/160,000 = $4

In 2016, the company would like to increase selling prices by 12.5%, and as a result expects a decrease in sales volume of 9%.

Selling prices = $6 x (1 + 12.5%) = $6.75

Sales volume = 160,000 x (1-9%) = 145,600 units

Total sales = 145,600 x $6.75 = $982,800

Cost of goods sold = 145,600 x $4 = $582,400

Gross margin = $982,800 - $582,400 = $400,400

Operating expenses $260,000 (fixed cost and remained constant)

Operating income = Total sales - Cost of goods sold - Operating expenses = $982,800 - $582,400 - $260,000 = $140,400