Monroe Products, Inc. is considering the development a new “XL” model that is ex
ID: 2714417 • Letter: M
Question
Monroe Products, Inc. is considering the development a new “XL” model that is expected to reduce sales of the existing “H” model. Forecasted sales quantities, prices and COGS of the H model without the introduction of the new XL model are shown below for years 2016-18 The sales quantities, unit prices and COGS if both the H and XL products are offered are also shown below. Determine the change in Gross Margin only for each year that could be used in preparing the proposal to develop and offer the XL model..
Sales Quantities 2016 2017 2018 H Only Sales quantity 350 375 400 Price $2,500 $2,500 $2,500 COGS $1,800 $1,800 $1,800 If both H and XL are offered H Sales quantity 265 250 200 Price $2,500 $2,250 $2,000 COGS $1,600 $1,600 $1,600 XL Sales quantity 100 150 250 Price $3,500 $3,350 $3,200 COGS $3,000 $2,500 $2,250 SolutionExplanation / Answer
Gross margin can be calculated as follows
Gross Margin = Gross Profit / Sales
Gross Profit = Sales - COGS
Sales = Sales quantity * price
See the below table for calculated values
Only H,
After XL is introduces, total sales = XL sales + H sales
H analysis is as follows
XL analysis is as follows
Total analysis is as follows
So gross margin increased by 0.49% in 2016, but it has decreased by 0.77% and 1.54% in 2017 and 2018 respectively
Year Quantity Price COGS Revenue Total COGS Gross Profit Gross Margin 2016 350 2,500 1,800 875,000 630,000 245,000 28.00% 2017 375 2,500 1,800 937,500 675,000 262,500 28.00% 2018 400 2,500 1,800 1,000,000 720,000 280,000 28.00%