Advanced enterprises reports yearminusend information from 2018 as follows: sales (160,250 units) $968,000 cost of goods sold 641,000 gross margin 327,000 operating expenses 263,000 operating income $64,000 advanced is developing the 2019 budget. in 2019 the company would like to increase selling prices by 14.5%, and as a result expects a decrease in sales volume of 9%. 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?

Advanced enterprises should increase the selling price because it will have greater Operating Income.

The sales volume will decrease to 145,827.5 (160,250 x (1 - 0.09)) because of increase in price to $6.92 ((968,000/160,250) x 1.1450). Since Cost of Goods Sold is variable at $4 per unit, Gross Margin is $2.92 per unit. 

Operating Income is then computed as follows:

Gross Margin (145,827.5 × $2.92)                     $425,816.30
Less: Operating Expenses                                  263,000
Operating Income                                                162,816.30

Thus, it is recommended that Advanced Enterprise increase their selling price because it will yield higher Operating Income.

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