$10\mathrm{.}4$ Projecting Gross Profit: The Effects of Volume versus Price.

LO $10-2$

Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate $6\mathrm{.}0\%$ revenue growth from price increases and $3\mathrm{.}0\%$ revenue growth from sales volume increases. Assume that the firm$$s production cost structure involves strictly variable costs. $($That is$,$ the cost to produce each unit of product remains the same.$)$ Should you project that the firm$$s 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$$s gross profit margin $($gross profit divided by sales$)$ will increase next year? If you project that the gross profit margin will increase, is the increase a result of volume growth, price growth, or both?