The bill of materials for each product at Steven’s Office Supply is very specific, right down to the number of casters needed for each office chair. Steven recognizes the importance of the documents for planning purposes, the manager uses this information as a guide for materials requisitions at the time of production.
These are the budgeted product costs and selling prices, respectively for the company’s three key products.
| Product Cost | Selling Price | |
|---|---|---|
| Office chairs | $145 | $239 |
| Sitting desk | $230 | $395 |
| Printer stand | $125 | $235 |
Steven has fine-tuned all cost expectations for his products, and his selling prices are stable for each product, as well. Steven was surprised when his accountant reported a significantly lower profit margin than what was expected.
The accountant reports the difference is attributable to the recent increase in shipping costs for the company’s raw materials. These higher freight costs caused a 20% increase in the budgeted product costs presented above.
A) What gross margin percentage was Steven originally expecting to earn on each product, per the information given?
B) How much of a reduction in gross margin did each product sustain after recognizing the higher costs?
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