Your firm's sales are estimated to increase by 10% in the next year.However,soon after the beginning of the year it becomes apparent that the growth in sales is more likely to be 20%.If your cost of good sold consists of both fixed and variable expenses,which of the following situations would you expect to be true?
A)The percentage change in gross profit should be greater than the percentage change in sales.
B)The percentage change in gross profit should be less than the percentage change in sales.
C)The percentage change in gross profit should be zero because gross profit is not a function of sales if some CGS are fixed.
D)The percentage change in gross profit should be the same as the percentage change in sales.

Question

Quizplus · Accepted Answer

When the growth in sales is higher than estimated, it means that the company will be selling more units, which reduces the average cost per unit due to economies of scale. This will increase the gross profit margin as a percentage of sales, resulting in a greater percentage change in gross profit than the percentage change in sales. Therefore, choice A is the best answer.

Your Firm's Sales Are Estimated to Increase by 10% in the Next