Advanced Enterprises reports year-end information from 2018 as follows:

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?
A) Yes, because operating income increases for 2019.
B) Yes, because sales revenue increases for 2019.
C) No, because sales volume decreases for 2019.
D) No, because gross margin decreases for 2019.

Question

Advanced Enterprises reports year-end information from 2018 as follows:

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?
A) Yes, because operating income increases for 2019. 
B) Yes, because sales revenue increases for 2019. 
C) No, because sales volume decreases for 2019. 
D) No, because gross margin decreases for 2019.

Quizplus · Accepted Answer

Yes, because it would result in an increase in operating income compared to 2018. The 2019 operating income would be: $1,008,608 -$583,310 (COGS)-$263,000 (operating expenses, which are fixed) = $162,298 compared to $64,000 in 2018.

Advanced Enterprises Reports Year-End Information from 2018 as Follows