February March Sales Revenue $25,000 $37,500 Cost of Goods Sold

| September 2, 2016

Question

February

March

Sales Revenue

$25,000

$37,500

Cost of Goods Sold

10,000

15,000

Gross Profit

15,000

22,500

Rent Expense

1,500

1,500

Wages Expense

3,500

5,000

Shipping Expense

1,250

1,875

Utilities Expense

750

750

Advertising Expense

750

875

Insurance Expense

400

400

Operating Income

$ 6,850

$12,100

Just after Ricardo completed an income projection for 1,200 stuffed mascots, his supplier called to inform him of a 20% increase in cost of goods sold (an increase from $10.00 per unit to $12.00 per unit), effective immediately. Ricardo knows that he cannot pass the entire increase on to his customers, but thinks he can pass on half of it while suffering only a 5% decrease in units sold. Should Ricardo respond to the increase in cost of goods sold with an increase in price? (Hint: Prepare two income statements; one with no increase in sales price and the other with the increase).

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