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Local Co. has sales of $ 10.2 million and cost of sales of $ 5.9 million....

Local Co. has sales of $ 10.2 million and cost of sales of $ 5.9 million. Its​ selling, general and administrative expenses are $ 510,000 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?

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Answer #1

a. Gross Margin = Gross Profit/Sales

where Gross Profit = Sales - Cost of Sales

So, Gross Profit = $10.2 mil - $5.9 mil = $4.30 mil

Gross Margin = $4.30mil/$10.2mil = 42.16%

b. Operating Margin = Operating Profit/Sales

where Operating Profit = Gross Profit - Admin Expenses - R&D Expenses - Depreciation

Operating Profit = $4.30mil - $0.51mil - $1.3mil - $1.2mil = $1.29mil

Operating Margin = $1.29mil/$10.2mil = 12.65%

c. Net Profit Margin = Net Income/Sales

where Net Income = (Operating Profit - Interest Expense) * (1 - Tax)

Net Income = ($1.29 mil - 0) * ( 1 - 35%) = $0.8385mil

Net Margin = $0.8385mil/$10.2mil = 8.22%

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