Question

Local Co. has sales of 10.8 million and cost of sales of $5.6 million. Its​ selling, general and administrative expenses are $500,000 and its research and development is $1.3 million. It has annual depreciation charges of $1.2 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?

d. If Local Co. had an increase in selling expenses of $270,000​, how would that affect each of its​ margins?

a. What is​ Local's gross​ margin?

​Local's gross margin is _​%. ​(Round to one decimal​ place.)

b. What is​ Local's operating​ margin?

​Local's operating margin is _%.​(Round to one decimal​ place.)

c. What is​ Local's net profit​ margin?

​Local's net profit margin is _​%.​(Round to two decimal​ places.)

d. If Local Co. had an increase in selling expenses of $270,000​, how would that affect each of its​ margins?  

​(Select the best choice​ below.)

A.Selling expenses only affect the net profit​ margin, but the increase in such expenses will not affect the other margins.

B.Selling expenses only affect the operating​ margin, but the increase in such expenses will not affect the other margins.

C.Selling expenses do not affect the gross​ margin, but the increase in such expenses will decrease the other margins.

D.Selling expenses only affect the gross​ margin, but the increase in such expenses will not affect the other margins.

Answer 1

Solution:-

(a)

Gross margin= Gross profit/Sales= (Sales-Cost of sales)/Sales= (10.8-5.6)/10.8= 48.15%

(b)

Operating margin= Operating profit/Sales= (Sales-cost of sales-selling general expenses-R&D expenses-depreciation)/Sales= (10.8-5.6-0.5-1.3-1.2)/10.8= 20.37%

(c)

Operating margin= Net profit/Sales= [(Sales-cost of sales-selling general expenses-R&D expenses-depreciation)*(1-tax rate)]/Sales= [(10.8-5.6-0.5-1.3-1.2)*(1-35%)]/10.8= 13.24%

(d)

Selling expenses is an indirect expense that is not deducted for calculation of gross profits, however is taken into consideration for operating profits and net profits. Thus, it will not impact gross margins but will reduce other margins.

Therefore, the correct option is option C.