Question

Advanced Enterprises reports year−end information from 2019 as​ follows: Sales ​(161,000 ​units) $965,000 Cost of goods sold ​(644,000​) Gross margin 321,000 Operating expenses ​(266,000​) Operating income $55,000 Advanced is developing the 2020 budget. In 2020 the company would like to increase selling prices by 14.5​%, and as a result expects a decrease in sales volume of 11​%. 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​ 2020?

Answer 1

Answer:

Advanced should increase the selling price in​ 2020.

Explanation:

Current selling price = Current sales value / Current sales volume = $965,000 / 161,000 = $5.99

Expected selling price = Current selling price * (100% + Expected percentage increase in selling price) = $5.99 * (100% + 14.5%) = $6.86

Expected sales volume = Current sales volume * (100% - Expected percentage increase in sales volume) = 161,000 * (100% - 11%) = 143,290 units

Expected sales value = Expected selling price * Expected sales volume = $6.86 * 143,290 = $982,762

Cost of goods sold per unit = Current cost of goods sold / Current sales volume = $644,000 / 161,000 = $4.00

Expected cost of goods sold = Expected sales volume * Cost of goods sold per unit = 143,290 * $4.00 =$ 573,160

Therefore, Advanced Enterprises expected operating income for 2020 can be computed as follows:

Details                                          $

Sales (143,290 units)             982,762

Cost of goods sold              (573,160)  

Gross margin                         409,602

Operating expenses           (266,000)  

Operating income               143,602  

Since the expected operating income of $143,602 for 2020 is greater than $55,000 operating income for 2019, Advanced should increase the selling price in​ 2020.