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In: Accounting

Advanced Enterprises reports yearminusend information from 2018 as follows: Sales (160,250 units) $968,000 Cost of goods...

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? A. Yes, because operating income increases for 2019. B. Yes, because sales revenue increases for 2019. C. No, because gross margin decreases for 2019. D. No, because sales volume decreases for 2019.

Expert Solution

Items	Amounts
Sales	968,000
Less:Cost of goods sold	641,000
Gross Margin	327,000
Less:Operating Expenses	263,000
Operating Income	64,000

Sales price per unit = Sales value / Sales Quantity

= 968,000/160,250 = $6.0406 per unit

New sales price will be 14.5% higher than old price:

= 6.0406 + 14.5% = $6.9164 per unit

* Given that , If selling price is increased by 14.5%, sales quantity will reduced by 9%

So New Sales Quantity = 160250 - 9% = 145,828 units

*Cost of goods sold is variable expense, as a percentage to Sales:

=(Cost of goods sold/Sales) *100

=(641000/968000)*100 = 66.22%

Therefore Cost of goods sold is 66.22% of sales

*Operating expenses are fixed regardless of units sold.

NEW INCOME STATEMENT

Items	Amounts
Sales (145828 x 6.9164)	1,008,605
Less:Cost of goods sold ( 1008605 x 66.22%)	667,898
Gross Margin	340,707
Less: Operating expenses (fixed)	263,000
Operating Income	77,707

It can be observed from the above statement that, Operating Income increased with increase of Sales price.

Therefore answer is

A. Yes, because operating income increases for 2019

ekkarill92 answered 12 hours ago

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