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

Of course you need to know what "gross margin percentage" means. Roughly speaking it is the profit as a percentage of sale price. When a unit costs $1.00 and is sold at $2.50 the excess revenue is $1.50 Although we could express this profit margin as a FRACTION of the sale price, (so this would be 1.50/2.5 = 3/5), it is usual to state this as a PERCENTAGE. The gross margin percentage in the original case would be 100 * 3/5 = 60% Let cost price be c, sale price be s. Gross margin percentage g = 100* (s - c)/s Solving this for sale price s s = c/[1 - (g/100)] When unit cost increases $0.25 we have c = 1.25 so s = 1.25[1 - 0.6] = 1.25/0.4 = 3.1 Action needed to maintain the gross margin percentage is to increase selling price to $3.10