Gross margin change

Question

Toothbrushes sold $700,000 at a 45% gross margin, last quarter. This quarter you plan to raise prices to increase your gross margin by 5 points, and you expect a 7% drop in sales dollars. What percent change in gross margin dollars would you expect?

Answer 1

So to solve this problem, we need to compare current gross margins to future gross margins. Ready?, Let's begin.

First, let's compute the current gross margin dollars.

1) Current gross margin dollars = Sales * Gross Margin % =

$700,000 * 45% = $315,000

Next, let's calculate what happens to Sales and gross margin with the new pricing plan.

We first must reduce the sales by 7%, so

$700,000 *.93 (1- .07) = $651,000. This is our new quarterly sales

Next, let's take our new sales of $651,000 and multiply that by our new gross margin % of 50% (45% + 5%)

2) $651,000 * 50% = $325,500...Nice increase in gross margin dollars

Finally, let's calculate the % increase in gross margin dollars. To do that, we take the new gross margin dollars, subtract out the old gross margin dollars, then divide that amount by the old gross margin dollars as follows:

3) $325,500 - $315,000 = $10,500

4) $10,500 / $315,000 = 3.33%

So while we raised prices to get a 5% increase in gross margin, because of the 7% reduction in sales, we only got a 3.33% increase in gross margin dollars.