Question

Vita Ltd. manufactures and distributes board games. The company has been in business for many years and has been successful. Performance has been squeezed in recent years by other forms of entertainment. The CEO is giving some thought to different pricing strategies for his products and wants to know the impact of the choices. One of the ideas is to reduce the selling price by 5 percent on all products. He thinks that by doing this sales volume will increase by 20 percent. During 2017, Vita produced and sold 460,000 games for $49 each. The cost of producing each game was $40.50 (cost of sales). All other costs of operating the business were $2,430,000. Cost of sales per unit would remain the same ($40.50) under the new pricing strategy and the other costs would remain $2,430,000. Required: a&b.If the CEO implemented the new strategy and his estimates were correct, determine the following using the 2017 as the basis for your calculations and what was the gross margin percentage and profit margin percentage in 2017? (Round percentage answers to 2 decimal places and the rest to whole dollar amount.) 2017 Proposed Sales in dollars ii Cost of sales Gross margin iv Net income v Gross margin percentage vi Profit margin percentage

Answer 1

	2017	Proposed
Sales in dollars	$22,540,000	$25,695,600	(552,000 x $46.55)
Cost of sales	$18,630,000	$22,356,000	(552,000 x $40.50)
Gross margin	$3,910,000	$3,339,600
Net income	$1,480,000	$909,600	($3,339,600 - $2,430,000)
Gross margin percentage	17.35%	13.00%	($3,339,600/$25,695,600)
Profit margin percentage	6.57%	3.54%	($909,600/$25,695,600)
Working
Units	552,000
(460,000 x 1.20)
Sales Price	$46.55
($49 x 0.95)