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

b-1. What are the gross margin and operating margin percentages for both divisions?

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

	Lake Region Coastal Region Operating income

b-2. How well have these divisions performed?

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).)

	Lake Region Coastal Region Gross margin percentage 35.88 % 50.00 % Operating margin % %

How well have these divisions performed? (Select all that apply.)

The reported divisional income for the Lake Region went down because sales fell in Coastal Region.checkbox unchecked1 of 6 Corporate overhead is allocated on the basis of relative revenues.checkbox checked2 of 6 Corporate overhead is allocated on the basis of absolute revenues.checkbox unchecked3 of 6 The performance of the Lake Region is affected by the results in the Coastal Region.checkbox unchecked4 of 6 The operating margin is greater in Lake Region.checkbox checked5 of 6 The gross margin percentage is higher in Coastal Region.

Answer 1

Operating income:

	Lake region	Coastal region
Sales	$4,080,000	$12,920,000
Cost of goods sold	2,616,300	6,460,000
Gross profit	1,463,700	6,460,000
Allocated corporate overhead	244,800	775,200
Other general and administration	538,900	3,740,000
Operating income	$680,000	$1,944,800

b1.

	Lake region	Coastal region
Gross margin percentage = Gross margin / Sales*100	$1,463,700/4,080,000*100 35.88%	$6,460,000/12,920,000*100 50%
Operating margin percentage = Operating income / Sales*100	$680,000/4,080,000*100 16.67%	$1,944,800/12,920,000*100 15.05%

b 2.

Corporate overhead are allocated on the basis of relative revenues.

The operating margin is greater in lake region

The gross profit margin is higher in coastal region