Question

Advanced Enterprises reports

yearminus?end

information from 2018 as? follows:

Sales ?(161 comma 250161,250 ?units)	$ 967 comma 000$967,000
Cost of goods sold	645 comma 000645,000
Gross margin	322 comma 000322,000
Operating expenses	264 comma 000264,000
Operating income	$ 58 comma 000$58,000

Advanced is developing the 2019 budget. In 2019 the company would like to increase selling prices by

12.512.5?%,

and as a result expects a decrease in sales volume of

99?%.

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??

Answer 1

For making the decision that whether to increase the selling price in 2019 or not, we need to prepare the budgeted income statement for 2019 which is shown as follows:-

Units Expected to be sold in 2019 = 161,250 units*(100% - 9%) = 146,737.50 units

Existing Selling Price = $967,000/161,250 = $6 per unit (approx)

New Selling Price = $6 per unit*112.50% = $6.75 per unit

Cost of goods sold per unit = $645,000/161,250 = $4 per unit

Budgeted Income Statement

For the year ending December 31, 2019 (Amounts in $)

Sales (146,737.50 units*$6.75 per unit)	990,478
Less: Cost of Goods Sold (146,737.50 units*$4 per unit)	(586,950)
Gross Margin	403,528
Less: Operating Expenses (Fixed Cost)	(264,000)
Operating Income	139,528

As there is an expected increase in net operating income from $58,000 in 2018 to $139,528 in 2019 with the increase in selling price, Advanced should increase the selling price in 2019.