If the selling price remains the same but the cost of goods increases, what happens to the gross margin percentage?

• A. It increases
• B. It decreases
• C. It stays the same
• D. It becomes negative

Answer: (B)

When you keep the selling price the same and increase the cost of goods sold, the gross margin percentage drops. That percentage is calculated as (Sales minus COGS) divided by Sales. With Sales constant, raising COGS lowers the gross profit while the denominator stays the same, so the ratio gets smaller.

For example, if the price is 100 and COGS is 60, gross profit is 40 and the margin is 40%. If COGS rises to 70 while price stays 100, gross profit falls to 30 and the margin becomes 30%. That’s a clear decrease. The margin would only become negative if COGS exceeded the selling price, which isn’t stated here; the standard effect of a cost increase with constant price is a reduced margin.