Question

Local Co. has sales of $ 10.0 million and cost of sales of $ 6.0 million. Its​ selling, general and administrative expenses are  $ 500,000 and its research and development is $ 1.0 million. It has annual depreciation charges of $ 1.0 million and a tax rate of 35 %. ​Local's gross margin is 40.00​%, its operating margin is 15.00​%, and its net profit margin is 9.75​%. If Local Co. had interest expense of $ 800,000​, how would that affect each of its​ margins?

​Local's new gross margin is ___%,

new operating margin is ___​%,

and new net profit margin is ___​%.

Answer 1

If we add interest expense there is no effect on gross profit & operating income,so there is no change between old and new ratio of gross and operating margins.only effect on net profit because in calculation of net profit we deducted interest as a expense,so,net margin will be change from 9.75% to 4.45%.

Calculation of net profit :-

Particular s	amount
Sale	10,000,000
Less-Cost of goods sold	(6,000,000)
Gross profit	4,000,000
Less-
Selling,general and administration expenses	(500,000)
Research and development cost	(1,000,000)
Depreciation	(1,000,000)
Operating income	1,500,000
Less- interest expense	(800,000)
Profit before tax	700,000
Less- tax@35%	(245,000)
Net profit	455000

Calculation of gross margin :-

Gross margin = (gross profit/ sales) ×100

= (4,000,000/10,000,000) × 100

= 40%

Operating margin =( operating income / sales)× 100

= (1,500,000/10,000,000) × 100

= 15%

Net profit margin = (net profit /sales) × 100

= (455,000/ 10000000) × 100

=4.55%