Pricing Decision BPO’s management believes the company has been successful at increasing sales because it has not increased the selling price of its products even though its competition has increased prices and costs have increased. Price and cost relationships in Year 1 were established because they represented industry averages. The following income statements are available for BPO’s fi rst three years of operation:

Year 3 Year 2 Year 1 Sales $ 125,000 $ 110,000 $ 100,000 Cost of goods sold 62,000 49,000 40,000 Gross profi t $ 63,000 $ 61,000 $ 60,000 Operating expenses 53,000 49,000 45,000 Net income $ 10,000 $ 12,000 $ 15,000 Required 1. Using the format in Example 13-5, prepare common-size comparative income statements for the three years.

2. Explain why net income has decreased while sales have increased.

3. Prepare an income statement for Year 4. Sales volume in units is expected to increase by 10%, and costs are expected to increase by 8%.

4. Do you think BPO should raise its prices or maintain the same selling prices?

Explain your answer.

Ethical Decision Making AppendixLO1