Question

Arlington Clothing, Inc., shows the following information for its two divisions for year 1:

   

	Lake Region			Coastal Region
Sales revenue	$	4,080,000		$	13,020,000
Cost of sales		2,615,000			6,490,000
Allocated corporate overhead		244,800			781,200
Other general and administration		546,900			3,780,000

The results for year 2 have just been posted:

	Lake Region			Coastal Region
Sales revenue	$	4,080,000		$	9,780,000
Cost of sales		2,615,000			4,820,000
Allocated corporate overhead		306,000			733,500
Other general and administration		535,000			3,780,000

Required:

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

   

b-1. 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).)

b-2. How well have these divisions performed? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

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

Answer 1

a) Compute divisional operating income for the two divisions

For year 1

	Lake Region	Costal region
Sales	4,080,000	13,020,000
(less) Cost of sales	2,615,000	6,490,000
Gross margin	1,465,000	6,530,000
(less) Allocated corporate overhead	244,800	781,200
(less)Other general and Administration	546,900	3,780,000
Operating income/margin	673300	1,968,800

For year 2

	Lake Region	Costal region
Sales	4,080,000	9780,000
(less) Cost of sales	2,615,000	4,820,000
Gross margin	1,465,000	4,960,000
(less) Allocated corporate overhead	306,000	733,500
(less)Other general and Administration	535,000	3,780,000
Operating income/margin	624,000	446,500

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

For year 1

Lake Region

Gross Margin percentage = Gross margin / Sales

= 1,465,000/4,080,000

= 0.359

Costal Region = 6,530,000/13,020,000

= 0.5015

For year 2

Lake Region

Gross Margin percentage = Gross margin / Sales

= 1,465,000/4,080,000

= 0.359

Costal Region = 4960,000/9780,000

= 0.5071

For year 1

Lake region

Operating margin = Operating income/sales

= 673300/4,080,000

=0.1650

Costal Region = 1,968,800/13,020,000

= 0.1512

For year 2

Lake region

Operating margin = Operating income/sales

= 624,000/4,080,000

=0.1529

Costal Region = 446500/9780,000

= 0.0456

b-2. How well have these divisions performed?

Correct statements:
>Divisional income is greater in Coastal region
>Gross Margin percentage is higher in Coastal region.
>Corporate Overheads appear to be allocated on the basis of revenue