Advanced enterprises reports yearminusend information from 2018 as follows: sales (160,250 units) $968,000 cost of goods sold 641,000 gross margin 327,000 operating expenses 263,000 operating income $64,000 advanced is developing the 2019 budget. in 2019 the company would like to increase selling prices by 14.5%, 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. should advanced increase the selling price in 2019?

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Sloane

Business

25 December, 01:36

Advanced enterprises reports yearminusend information from 2018 as follows: sales (160,250 units) $968,000 cost of goods sold 641,000 gross margin 327,000 operating expenses 263,000 operating income $64,000 advanced is developing the 2019 budget. in 2019 the company would like to increase selling prices by 14.5%, 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. should advanced increase the selling price in 2019?

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Randall Davis · Answer 1

Advanced enterprises should increase the selling price because it will have greater Operating Income.

The sales volume will decrease to 145,827.5 (160,250 x (1 - 0.09)) because of increase in price to $6.92 ((968,000/160,250) x 1.1450). Since Cost of Goods Sold is variable at $4 per unit, Gross Margin is $2.92 per unit.

Operating Income is then computed as follows:

Gross Margin (145,827.5 * $2.92) $425,816.30

Less: Operating Expenses 263,000

Operating Income 162,816.30

Thus, it is recommended that Advanced Enterprise increase their selling price because it will yield higher Operating Income.