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5 December, 00:21

Local Co. has sales of $ 10.4 million and cost of sales of $ 5.9 million. Its selling, general and administrative expenses are $ 480 comma 000 and its research and development is $ 1.4 million. It has annual depreciation charges of $ 1.3 million and a tax rate of 35 %. a. What is Local's gross margin? (answer in %, Round to one decimal place.)

b. What is Local's operating margin? (answer in %, Round to one decimal place.)

c. What is Local's net profit margin? (answer in %, Round to two decimal places.)

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  1. 5 December, 00:35
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    (a) 43.26%

    (b) 12.69%

    (c) 8.25%

    Explanation:

    (a) Gross profit:

    = Sales - cost of sales

    = $10,400,000 - $5,900,000

    = $4,500,000

    Local's gross margin:

    = (Gross profit : Total sales) * 100

    = ($4,500,000 : $10,400,000) * 100

    = 0.4326 * 100

    = 43.26%

    (b) Local's operating margin:

    = [ (Gross profit - selling, general and administrative expenses-Depreciation-Research and development) : Total sales] * 100

    = [ ($4,500,000 - $480,000 - $1,300,000 - $1,400,000) : $10,400,000] * 100

    = ($1,320,000 : $10,400,000) * 100

    = 0.1269 * 100

    = 12.69%

    (c) Operating income:

    = Sales - cost of sales - selling, general and administrative expenses - Depreciation - Research and development

    = $10,400,000 - $5,900,000 - $480,000 - $1,300,000 - $1,400,000

    = $1,320,000

    Taxes = Operating income * tax rate

    = $1,320,000 * 35%

    = $462,000

    Local's net profit margin:

    = [ (Operating income - Taxes) : Sales] * 100

    = [ ($1,320,000 - $462,000) : $10,400,000] * 100

    = ($858,000 : $10,400,000) * 100

    = 0.0825 * 100

    = 8.25%
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