Question

Base Questions 25-27 on the following information:

                                                2018                2019             2020     

Revenue                                    800                   856                899

COGS                                              500

Gross Profit                                  300

**Assume that in 2018 $300 of COGS was Variable and $200 was fixed.

25.  Assuming revenue growth was driven by 5% volume and 2% price in 2019, what is the gross profit in 2019?  Show your work.

26.  Assuming revenue growth in 2020 was driven by 4% volume growth and 1% price increase, what would be gross profit in 2020?  Show your work.

27.  Assume that the revenue increase was solely attributable to price increases in both 2019 and 2020.  In this scenario, would gross profit be higher or lower than the gross profit you calculated in #26.  Please explain your answer.  You do not need to calculate the exact number—you can answer this based on what was discussed in class.

Answer 1

Ans 25) Gross Profit = Revenue - Cost of good sold

= $856 - (500 * 1.050) ( cost of good sold = cost of good sold in year 2018 * (1 + increase in volume in 2019 over 2018)

= $856 - $525

= $331

Ans 26) Gross Profit = Revenue - Cost of good sold

= $899 - $525 * 1.04

= $899 - $546

= $353

Ans 27) Since the reveune is attibued by the only price increase there will be no change in the cost of good sold in that case gross profit will higher in comparision to answer 25 and 26.