Question

Company X reports $200,000 in sales of Widgets in 2019. The Costs of Goods sold for these Widgets is $90,000. All other operating expenses (SG&A, R&D, Depreciation, Other, etc.) are $50,000. Which of the following is the correct representation of the profitability ratios: a) Gross Profit Margin 45%, Operating Margin 30%. b) Gross Profit Margin 55%, Operating Margin 30%. c) Gross Profit Margin 45%, Operating Margin 20%. d) Gross Profit Margin 55%, Operating Margin 20%

Answer 1

Solution:

Calculation of Gross Profit Margin:

The formula for calculating the Gross profit margin is

= Gross Profit / Sales

= ( Sales – Cost of goods sold ) / Sales

As per the information given in the question we have

Sales = $ 200,000 ; Cost of goods sold = $ 90,000

Applying the above information in the formula for Gross profit margin we have

= ( $ 200,000 - $ 90,000 ) / $ 200,000

= $ 110,000 / $ 200,000

= 0.55

= 55 %

Thus the Gross profit margin = 55 %

Calculation of Operating Margin:

The formula for calculating the Operating margin is

= Operating Income / Sales

= ( Sales – Cost of goods sold – Operating Expenses ) / Sales

As per the information given in the question we have

Sales = $ 200,000 ; Cost of goods sold = $ 90,000 ; Operating Expenses = $ 50,000

Applying the above information in the formula for Operating margin we have

= ( $ 200,000 - $ 90,000 - $ 50,000 ) / $ 200,000

= $ 60,000 / $ 200,000

= 0.30

= 30 %

Thus the Operating margin = 30 %

Thus the solution is Option b) Gross profit Margin = 55 % ; Operating Margin = 30 %