Question

Local Co. has sales of $ 10.7 million and cost of sales of $ 5.9 million. Its​ selling, general and administrative expenses are $ 550 comma 000 and its research and development is $ 1.2 million. It has annual depreciation charges of $ 1.4 million and a tax rate of 35 %. a. What is​ Local's gross​ margin? b. What is​ Local's operating​ margin? c. What is​ Local's net profit​ margin?

Answer 1

Explanation:

The computation is shown below:

a. The gross margin is

Gross margin = (Sales revenues - Cost of sales) ÷ (Sales revenues) × 100

= ($10.7 million - $5.9 million) ÷ ($10.7 million) × 100

= 45%

b. The local operating margin is

= (Operating income ÷ Sales) × 100

where,

Operating income is

= (Sales - cost of sales - selling, general & administrative expenses - research & development - Depreciation & Amortization) ÷ (Sales revenue) × 100

= ($10.7 million - $5.9 million - $0.55 million - $1.2 million - $1.4 million) ÷ ($10.7 million) × 100

= ($1.65 million)  ÷ ($10.7 million) × 100

= 15.42%

c. Net profit margin

= (Net profit ÷ Sales) × 100

where,

= (Sales - cost of sales - selling, general & administrative expenses - research & development - Depreciation & Amortization) × (1 - tax rate) ÷ (Sales revenue) × 100

= ($10.7 million - $5.9 million - $0.55 million - $1.2 million - $1.4 million) × (1 - 0.35) ÷ ($10.7 million) × 100

= ($1.0725 million)  ÷ ($10.7 million) × 100

= 10.02%