Abercr decines. A&Fs total sales were $7 billion last year, but they have been d
ID: 2333641 • Letter: A
Question
Abercr decines. A&Fs total sales were $7 billion last year, but they have been declining in the face of a weak economy and an intensively competitive retail environment. Price & Fitch, once the favorite of loyal teens, is considering lowering prices on all items it sells in an effort to win them back after several years of sales s are often effective in increasing sales, but marketers need to analyze how much sales must go up before a price reduction pays off and increases revenue enough to make the it worth doing. Assuming A&Fs gross proft margin is 65 percent and cost of goods sold represents the only variable cost, by how much must sales increase to maintain the same gross profit margin in terms of absolute dollars if A&F lowers prices by 5 percent?Explanation / Answer
Given:
Total Sales: $7 Billion
Gross Profit Margin : 65%
Decrease in Price : 5%
1. Calculation of Gross Profit:
Gross Profit = Total Sales * Percentage of Gross Profit Margin
Gross Profit = $7 Billion * 65%
= $ 4.55 Billion
Hence, The Current Gross Profit is $ 4.55 Billion
2. Calculation of New Price:
New Price = Initial Price - Percentage of Decrease in Price
= $1 - 5%
= $1 - $0.05
= $0.95
Hence, When we set the initial Price equal to $1.00. The New Price will be $0.95
3. Calculation of Gross Profit Margin:
New Gross Profit Margin = (New Total Sales - Cost of Goods Sold)/New Total Sales
= ($6.65 Billion - $ 2.45 Billion) / $ 6.65 Billion
= $ 4.2 Billion / $ 6.65 Billion
= 0. 6316 ( Rounded to four Decimal Places)
Where,
a. New Total sales = Current Sales * New Price Per Quantity
= $ 7 Billion * 0.95
= $ 6.65 Billion
b. Cost of Goodds Sold = Current Sales - Gross Profit
= $ 7 Billion - $ 4.55 Billion
= $ 2.45 Billion
(Note: Cost of Goods Sold remains same irrespective of changes in Sales Price)
4. Calculation of New Sales level to maintain the Original Gross Profit Margin in terms of Absolute Dollar
= Current Gross Profit / New Gross Profit Margin
= 4.55 / 0.6316
= $ 7.2040 Billion ( Rounded to four Decimal Places)
Hence, New Sales level to maintain the Original Gross Profit Margin in terms of Absolute Dollar is $ 7.2040 Billion.
5. Calculation of Increase in Sales:
Increase in Sales = New Sales - Current Sales
= $ 7.2040 Billion - $ 7 Billion
= $ 0.2040 Billion.
Hence, Increase in Sales is $ 0.2040 Billion.
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