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Discussion questions: From last year to this year, Berry Barn reported that its Net Sales increased...

Discussion questions:
From last year to this year, Berry Barn reported that its Net Sales increased from $300,000 to $400,000 and its Gross Profit increased from $90,000 to $130,000. Was the Gross Profit increase caused by (a) an increase in sales volume only, (b) an increase in gross profit per sale only, or (c) a combination of both? Explain your answer.

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Answer #1

The correct answer is option c i.e. a combination of both sales volume and gross profit per sale is the reason why gross profit of Berry Barn has increased.

Explanation:

Last year's gross profit % = $90,000 / $300,000 = 30%

So, if we apply the same gross profit % to the current year's sales, gross profit would be $120,000 (30% of $400,000)

Hence, we can say that out of the total increase in gross profit of $40,000, $30,000 ($120,000 - $90,000) is due to the increase in sales volume and balance $10,000 is due to the increase in gross profit per sale.

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