Question

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

	Lake Region			Coastal Region
Sales revenue	$	4,200,000		$	13,110,000
Cost of sales		2,711,300			6,555,000
Allocated corporate overhead		252,000			786,600
Other general and administration		557,900			3,759,000

Required:

a. Compute divisional operating income for the two divisions. Ignore taxes.

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

b-2. How well have these divisions performed?

Answer 1

		Lake Region	Coastal Region
i	Sales revenue	4,200,000	13,110,000
ii	Cost of sales	2,711,300	6,555,000
iii	Allocated corporate overhead	252,000	786,600
iv	Other general and administration	557,900	3,759,000
ans a
v=i-ii-iii-iv	Operating income =	678,800	2,009,400
ans b-1
vii=i-ii	Gross margin	1,488,700	6,555,000
viii=vii/i	Gross margin %	35.45%	50.00%
vi=v/i	Operating income %=	16.16%	15.33%
ans b-2	From above we can see that gross margin of Coastal region is higher
	but operating income % of Lake region higher.
	this is because general and administration overhead for Coaster region is very high.