Question

La Mesa Foods has the following data for its two divisions for the year: Dos Revenues Cost of sales Allocated corporate overhead Other general & administration Uno $600,000 384,750 36,000 79,250 $1,900,000 950,000 114,000 550,000 Required: a. Compute divisional operating income for each of the divisions. Assume taxes are 30%. b. Calculate the gross margin ratio for each division. c. Calculate the operating margin ratio for each division. d. Calculate the profit margin ratio for each division.

Answer 1

Answer a. Computation of divisional operating income after tax (Net income) for each of the divisions.

	Uno	Dos
Revenues	$600,000	$1,900,000
Cost of sales	384,750	950,000
Gross Margin	215,250	950,000
Allocated corporate overhead	36,000	114,000
Other general & administration	79,250	550,000
Operating income	100,000	286,000
Taxes (30 %)	30,000	85,800
Net income	$70,000	$200,200

Answer b. Computation of gross margin ratio

	Uno	Dos
Gross Margin Ratio = Gross Margin / Revenues	($215,250 / $600,000) = 35.88 %	($950,000 / $1,900,000) = 50 %

Answer c. Computation of operating margin ratio

	Uno	Dos
Operating margin ratio = Operating income / Revenues	($100,000 / $600,000) = 16.67 %	($286,000 / $1,900,000) = 15.05%

Answer d. Computation of profit margin ratio.

	Uno	Dos
Profit margin ratio = Net income / Revenues	($70,000 / $600,000) = 11.67 %	($200,200 / $1,900,000) = 10.54%