Question

Local Co. has sales of $10.9 million and cost of sales of $5.9 million. It's​ selling, general and administrative expenses are $510,000

and its research and development is $11million. It has annual depreciation charges of $1.3 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

a) local co. has

Sales = $10.9 million

Cost of goods sold = $5.9million

We have to calculate gross margin . For gross margin , we need gross profit

So, Gross profit = sales - cost of goods sold

= $10,900,000 - $5,900,000

= $5,000,000

Now, Gross margin = Gross profit/ sales

=$5,000,000/ $10,900,000

= 0.4587 or 45.87%

b) Now we have to calculate operating margin

For that , we need operating profit

Operating profit = Gross profit - selling, general and administration expenses - research and development - depreciation

=$5,000,000- $510,000-$1,100,000- $1,300,000

= $2,090,000

According to me , research and Development expenses given above should be $1.1 million instead of $11 million otherwise there will be no profit , only loss.

That is why i have taken research and development expenses as $1.1 million

Operating margin = operating profit / sales

= $2,090,000/$10,900,000

= 0.1917 or 19.17%

c) net profit margin :-

Now we will calculate net profit

Net profit = operating profit - tax

= $2,090,000 - 0.35 ($2,090,000)

= $1,358,500

Net profit margin = net profit / sales

= $1,358500/ $10,900,000

=0.1246 or 12.46%