Question

Local Co. has sales of $10.8 million and cost of sales of $5.7 million. Its selling, general and administrative expenses are $490,000 and its research and development is $1.1 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? a. What is Local's gross margin? Local's gross margin isl%. (Round to one decimal place.) b. What is Local's operating margin? Local's operating margin is %. (Round to one decimal place.) c. What is Local's net profit margin? Local's net profit margin is %. (Round to two decimal places.)

Answer 1

Answer:

As per given data, lets first make the income statement of subject company:

Local Co. Income Statement
Total Sales Revenue	10800000
Cost of Sales	5700000
Gross Profit	5100000
Expenses
Admin expenses	490000
R and D expenses	1100000
Depreciation	1200000
Total Expenses	2790000
Operating Income(EBT)	2310000
Tax @ 35%	808500
Net Income	1501500

Now let us calculate the required ratios:

1. Gross profit margin = Gross profit / Total Sales Revenue = 5100000/10800000 = 47.2%

2. Operating Margin = Operating Income / Total Sales Revenue = 2310000/10800000 = 21.4%

3. Net profit margin = Net income / Total Sales Revenue = 1501500/10800000 = 13.9%