Question: 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,

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 6.0 percent revenue growth from price increases and 3.0 percent 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?

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