February March Sales Revenue $25,000 $37,500 Cost of Goods Sold 10,000 15,000 Gr
ID: 2422129 • Letter: F
Question
February
March
Sales Revenue
$25,000
$37,500
Cost of Goods Sold
10,000
15,000
Gross Profit
15,000
22,500
Rent Expense
1,500
1,500
Wages Expense
3,500
5,000
Shipping Expense
1,250
1,875
Utilities Expense
750
750
Advertising Expense
750
875
Insurance Expense
400
400
Operating Income
$ 6,850
$12,100
Just after Ricardo completed an income projection for 1,200 stuffed mascots, his supplier called to inform him of a 20% increase in cost of goods sold (an increase from $10.00 per unit to $12.00 per unit), effective immediately. Ricardo knows that he cannot pass the entire increase on to his customers, but thinks he can pass on half of it while suffering only a 5% decrease in units sold. Should Ricardo respond to the increase in cost of goods sold with an increase in price? (Hint: Prepare two income statements; one with no increase in sales price and the other with the increase).
February
March
Sales Revenue
$25,000
$37,500
Cost of Goods Sold
10,000
15,000
Gross Profit
15,000
22,500
Rent Expense
1,500
1,500
Wages Expense
3,500
5,000
Shipping Expense
1,250
1,875
Utilities Expense
750
750
Advertising Expense
750
875
Insurance Expense
400
400
Operating Income
$ 6,850
$12,100
Explanation / Answer
Given: Ref February March Nomal Selling Price (Without Increase) = 1) 25000/1200 37500/1200 Selling Price Per One = 2) 20.83 31.25 New Selling Price is = 50% of Below 3i) 3) 1 1 Increase in Material Cost 3i) 2 2 Revised Selling Price (Old +Increase) 1)+3) 21.83 32.25 No of Units at Revised Selling Price 1200*95% 1140 1140 Revised Material Cost per Revised Units 13,680 13,680 Income Statement of Ricardo for Feb & March' Particulars Without Increase With Increase February March February March Sales Revenue 25,000 37,500 24,890 36,765 Cost of Goods Sold 10,000 15,000 13,680 13,680 Gross Profit 15,000 22,500 11,210 23,085 Rent Expense 1,500 1,500 1,500 1,500 Wages Expense 3,500 5,000 3,500 5,000 Shipping Expense 1,250 1,875 1,250 1,875 Utilities Expense 750 750 750 750 Advertising Expense 750 875 750 875 Insurance Expense 400 400 400 400 Operating Income 6,850 12,100 3,060 12,685 It is Not Recommonded for Increase in Price as his Gros Profits has been Decresed for 37,500 to 34,295
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