Question

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

	Lake Region			Coastal Region
Sales revenue	$	4,020,000		$	12,930,000
Cost of sales		2,621,300			6,465,000
Allocated corporate overhead		241,200			775,800
Other general and administration		539,900			3,741,000

Required:

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

	Lake Region Coastal Region Gross margin percentage % % Operating margin % %

Answer 1

Part :b-1

I.

Computation of gross margin percentage of L is:

Gross margin percentage of L = (Value of gross profit of L / Value of sales) * 100

= ($1,398,700 / $4,020,000) * 100

= 0.3479 * 100

= 34.79%

Hence, the gross margin percentage of L is 34.79%.

Working notes:

Computation the value of gross profit of L is:

Value of gross profit of L = Value of sales - Cost of sales

= $4,020,000 - $2,621,300

= $1,398,700

Hence, the value of gross profit of L is $1,398,700.

II.

Computation of gross margin percentage of C is:

Gross margin percentage of C = (Value of gross profit of C / Value of sales) * 100

= ($6,465,000 / $12,930,000) * 100

= 0.50 * 100

= 50%

Hence, the gross margin percentage of C is 50%.

Working notes:

Computation the value of gross profit of C is:

Value of gross profit of C = Value of sales - Cost of sales

= $12,930,000 - $6,465,000

= $6,465,000

Hence, the value of gross profit of C is $6,465,000.

III.

Computation of operating margin percentage of L is:

Operating margin percentage of L= (Value of operating income of L / Value of sales) * 100

= ($617,600 / $4,020,000) * 100

= 0.1536 * 100

= 15.36%

Hence, the operating margin percentage of L is 15.36%.

Working note:

Computation the value of operating income of L is:

Value of operating income of L = Value of gross profit of L - Value of overhead - Value of other general and administration

= $1,398,700 - $241,200 - $539,900

= $617,600

Hence, the value of operating income of L is $617,600.

IV.

Computation of operating margin percentage of C is:

Operating margin percentage of C = (Value of operating income of C / Value of sales) * 100

= ($1,948,200 / $12,930,000) * 100

= 0.1507 * 100

= 15.07%

Hence, the operating margin percentage of C is 15.07%.

Working note:

Computation the value of operating income of C is:

Value of operating income of C = Value of gross profit of C - Value of overhead - Value of other general and administration

= $6,465,000 - $775,800 - $3,741,000

= $1,948,200

Hence, the value of operating income of C is $1,948,200.