You sells specialty sweatshirts. The purchase price is $10 per unit plus 10%tax and a shipping cost of .50 cents per unit. When the units arrive, they must be labeled, at an additional cost of .75 cents per unit. Emblems purchased, received and labeled 1,500 units, of which 750 units were sold during the month for $20 each. The controller has prepared the following income statement:
Sales $15,000
Cost of sales ($11 x 750) 8,250
Gross profit $ 6,750
Shipping expense 750
Labeling expense 1,125
Net income $ 4,875
Emblem is aware that a gross profit of 40% is standard for the industry. The marketing manager believes that Emblems should lower the price because the gross profit is higher than the industry average.
Required. 1. Calculate Emblems’ gross profit ratio. 2. Explain why Emblems should or should not lower its selling price. (Hint: Breakdown your selling price per unit and the cost of sales per unit include Tax, Shipping and Labeling, this will give you a different Gross Profit Ratio)
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