Question

Local Co. has sales of $ 10.6 million and cost of sales of $ 6.2 million. Its​ selling, general and administrative expenses are  $ 490 comma 000 and its research and development is $ 1.3 million. It has annual depreciation charges of $ 1.5 million and a tax rate of 35 %.

a. What is​ Local's gross​ margin?

b. What is​ Local's operating​ margin?

c. What is​ Local's net profit​ margin?

d. If Local Co. had an increase in selling expenses of $ 290 comma 000​, how would that affect each of its​ margins?

e. If Local Co.had interest expense of $ 800 comma 000​, how would that affect each of its​ margins?

Answer 1

a. Gross Margin = Gross Margin / Sales = 4,400,000/ 10,600,000 = 41.51%

b. Operating margin = Operating Margin / Sales = 1,110,000/ 10,600,000 = 10.47%

c. Net profit = Net profit margin / Sales = 6.81%

Sales	10,600,000
Less:Cost of sales	6,200,000
Gross Margin	4,400,000
Less: selling, general and administrative expenses	490,000
Depreciation	1,500,000
Research and development costs	1,300,000
Operating margin	1,110,000
Less: tax @35%	388,500
Net Profit	721,500

d. Increase in selling expenses will not effect the gross margin, but will reduce the operating margin and net profit

e. Only net profit margin is effected, operating and gross margin will remain unchanged.