ACCOUNTING
Multiple Choice
Katie Enterprises reports the year-end information from 20x4 as follows:
Sales (70,000 units) $560,000
Cost of goods sold 210,000
Gross margin 350,000
Operating expenses 200,000
Operating income $ 150,000
Katie is developing the 20x5 budget. In 20x5 the company would like to increase selling prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.
Should Katie increase the selling price in 20x5?
a. Yes, because sales revenue is increased for 20x5
b. Yes, because operating income is increased for 20x5
c. No, because sales volume decreases for 20x5
d. No, because gross margin decreases for 20x5
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