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Local Co. has sales of $10.4 million and cost of sales of $6.3 million. Its selling, general and...

Question:

Local Co. has sales of $10.4 million and cost of sales of $6.3 million. Its selling, general and administrative expenses are $450,000 and its research and development is $1.4 million. It has annual depreciation charges of $1.5 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?

Gross Profit Margin:

Gross profit is the trading profit of the business which represents the difference between the sales revenue and the cost of goods sold. In order to compute the gross profit margin, the gross profit has to be divided with the annual sales revenue. The margin is expressed as a percentage of sales. From gross profit, the operating profit is derived and from it, the net profit is derived.

Answer and Explanation:


Answer:

a) Local Co's gross margin is 39.42%.

Computation:

  • Gross margin = Gross profit / Sales
  • Gross margin = $4,100,000 / $10,400,000
  • Gross margin = 39.42%

Note:

Gross profit = (Sales - Cost of goods sold)

Gross profit = ($10,400,000 - $6,300,000)

Gross profit = $4,100,000

b) Local Co's operating margin is 7.21%.

Comutation:

  • Operating margin = Operating income / Sales
  • Operating margin = $750,000 / $10,400,000
  • Operating margin = 7.21%

Note:

Operating profit = Gross profit - Selling, general and administrative expenses - Research and development - Depreciation charges

Operating profit = $4,100,000 - $450,000 - $1,400,000 - $1,500,000

Operating profit = $750,000

C) Local Co's net profit margin is 4.69%.

Comutation:

  • Net profit margin = Net profit / Sales
  • Net profit margin = $487,500 / $10,400,000
  • Net profit margin = 4.69%

Note:

Net profit = Operting income * (1 - taxes)

Net profit = $750,000 * (1 - 0.35)

Net profit = $487,500


Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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