Gross Profit for a Merchandiser
Emblems For You sells specialty sweatshirts. The purchase price is $10 per unit plus 10% tax and a shipping cost of 50¢ per unit. When the units arrive, they must be labeled, at an additional cost of 75¢ 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:
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Sales
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$15,000
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Cost of sales ($11 x 750)
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8,250
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Gross profit
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$ 6,750
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Shipping expense
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750
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Labeling expense
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1,125
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Net income
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$ 4,875
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Emblems 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.