Answer question 8 by using the information below: Khaki Inc reports year-end inf
ID: 2563255 • Letter: A
Question
Answer question 8 by using the information below:
Khaki Inc reports year-end information from 2017 as follows:
$490 000
$22 500
Bambi is developing the 2018 budget. In 2018 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 8%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.
8) Should Khaki Inc increase the selling price in 2018?
Select one:
a. No, because gross margin decreases for 2018
b. Yes, because operating profit is increased for 2018
c. No, because sales volume decreases for 2018
d. Yes, because sales revenue is increased for 2018
Sales (70 000 units)$490 000
Cost of goods sold 367 500 Gross margin 122 500 Operating expenses 100 000 Operating profit$22 500
Explanation / Answer
Ans. B Yes, because operating profit is increased for 2018. Particulars Amount Sales (64400 * 7.7) 495880 Less: Cost of goods sold (64400 * 5.25) 338100 Gross Profit 157780 Less: Operating Expenses 100000 Operating Profit 57780 *Variable cost per unit = Total variable cost / Sales units =367500 / 70000 =5.25 Calculation for 2018 New selling price = 7+10% = 7.7 New sales volume = 70000 - 8% = 64400 units *Selling price = Total sales / sales volume = 490000 / 70000 = 7per unit *Fixed Expenses(operating expenses) remain constant. *The new sales volume is used to calculate Variable Cost.