Question

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

	Lake Region			Coastal Region
Sales revenue	$	4,200,000		$	13,020,000
Cost of sales		2,645,000			6,540,000
Allocated corporate overhead		252,000			781,200
Other general and administration		554,900			3,750,000

The results for year 2 have just been posted.

	Lake Region			Coastal Region
Sales revenue	$	4,200,000		$	9,720,000
Cost of sales		2,645,000			4,730,000
Allocated corporate overhead		315,000			729,000
Other general and administration		538,000			3,750,000

Required:

a. Compute divisional operating income for the two divisions.

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

b-2. How well have these divisions performed?

Answer 1

a) Divisional Operating income $ OOOOO Sales Revenue Cost Of Sales Gross Margin (a-b) Allocated Operating Overheads Other general and admin Operating Income (c-d-e) Lake Region Year 1 Year2 42,00,000 $ 42,00,000 26,45,000 26,45,000 15,55,000 15,55,000 2,52,000 3,15,000 5,54,900 5,38,000 7,48,100 7,02,000 Coastal Region Year 1 Year2 $1,30,20,000 $ 97,20,000 65,40,000 47,30,000 64,80,000 49,90,000 7,81,200 7,29,000 37,50,000 37,50,000 19,48,800 5,11,000 b) Margin bOS Gross margin (c/a*100) Operating Margin (f/a) 37.02% 17.81% 37.02% 16.71% 49.77% 14.97% 51.34% 5.26%

Lake Region Division : 1) There is no change in sales revenue and cost of sales of year 1 and year 2 hence gross margin also same. 2) in year 2, there is small reduction in operating margin due to increase in allocated overheads. 3) Overall Lake Region has stable income as compare to year 1 Coastal Region Division : There is significant reduction in sale revenue in year 2 due to which overall operating income and margin has been reduced. There is small increase in gross margin percentage which is due to relative decrease in cost to sales is more than reduction in sales. 3) Although sales reduced significantly there is no reduction in operating costs which denotes that the most of operating expenses are fixed in nature. Coastal Region Division are not performing well as compare to year 1 and Lake division, there is need to increase sales revenue.