Question

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.)

Answer 1

Answer:

(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%