Future Business Leaders of America (FBLA) Marketing Practice Test

To maintain the same gross profit margin, what price should Big Company charge for the new product, Little Squares, if the cost to make them is $2 less than Big Squares sold for $42?

1. $40.00

2. $38.00

3. $42.00

4. $41.00

The correct answer is: $40.00

To determine the appropriate price that Big Company should charge for Little Squares while maintaining the same gross profit margin as Big Squares, it’s essential to first understand the cost structure of Big Squares. Given that Big Squares are sold for $42 and the cost to make Little Squares is $2 less, the cost to manufacture Little Squares becomes $42 - $2, which equals $40. The gross profit margin is calculated by subtracting the cost from the selling price and then dividing by the selling price, expressed as a percentage. To maintain the same gross profit margin with Little Squares as that of Big Squares, the selling price must be determined such that the relationship between the cost and the selling price remains consistent. For Big Squares: - Selling Price = $42 - Cost = $40 (since selling price minus gross profit equals cost) - Gross Profit = $42 - $40 = $2 To maintain the same gross profit margin with Little Squares, where the cost to make Little Squares is also $40, the selling price must also be set to $40. This reflects the same $2 gross profit margin, achieving the identical gross profit margin as Big Squares. Thus, by charging $40 for Little Squares, Big Company ensures that the gross