Question

Arlington Clothing, Inc., shows the following information for its two divisions for year 1:

	Lake Region			Coastal Region
Sales revenue	$	4,080,000		$	12,920,000
Cost of sales		2,616,300			6,460,000
Allocated corporate overhead		244,800			775,200
Other general and administration		538,900			3,740,000

The results for year 2 have just been posted:

	Lake Region			Coastal Region
Sales revenue	$	4,080,000		$	9,520,000
Cost of sales		2,616,300			4,760,000
Allocated corporate overhead		306,000			714,000
Other general and administration		538,900			3,740,000

Required:

a. Compute divisional operating income for the two divisions. (Enter your answers in thousands of dollars rounded to 1 decimal place.)

b-1. What are the gross margin and operating margin percentages for both divisions? (Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.12).)

b-2. How well have these divisions performed? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

	The reported divisional income for the Lake Region went down because sales fell in Coastal Region.
	Corporate overhead is allocated on the basis of relative revenues.
	Corporate overhead is allocated on the basis of absolute revenues.
	The performance of the Lake Region is affected by the results in the Coastal Region.
	The operating margin is greater in Lake Region.
	The gross margin percentage is higher in Coastal Region.

Answer 1

Answer
Divisional Operating Income Statement
Particulars	Lake Region		Coastal Region
	Year 1	Year 2	Year 1	Year 2
Sales	4080000	4080000	12920000	9520000
Cost of Sales	2616300	2616300	6460000	4760000
Gross Margin	1463700	1463700	6460000	4760000
(Sales-Cost of Sales)
Allocated corporate overhead	244800	306000	775200	714000
Other General and Administration	538900	3740000	538900	3740000
Operating Margin	680000	-2582300	5145900	306000
Gross Margin %	35.88%	35.88%	50.00%	50.00%
Gross margin/Sales
Operating Margin%	16.67%	-63.29%	39.83%	3.21%
(Operating margin/Sales)
Gross Margin% is higher in Coastal Region