CAPITAL BUDGETING

| December 9, 2015

Projecting gross profit: the effects of volume versus price. Suppose you are analyzing a firm that is successfully executing strategy that differentiates its products from those of its competitors. Because of this strategy you project that next year the firms will generate 6.0% revenue growth from price increase and 3.0% revenue growth from sales volume increases. Assume that the firm production cost structure involves strictly variable cost. (that is the cost to produce each unit of product remains the same.) should you project that the firm gross profit will increase next year? If you project that the gross profit will increase is the increase a result of volume growth price growth or both? Should you project that the firm%u2019s gross profit margin (gross profit divided by sales) will increase next years? If you project that the gross profit margin will increase is the increase a result of volume growth price growth or both?

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