Subimt Tes s Question: 1 pt 18 (0 complete) This Test: 18 pts possib ocal Co has
ID: 2584332 • Letter: S
Question
Subimt Tes s Question: 1 pt 18 (0 complete) This Test: 18 pts possib ocal Co has sales of $10 0 milion and cost of sales of $5 0 milion ts seling, general and a $1.0 milion thas arrual deprecation charges of St O milion and a tar rateof as% . What is Local's gross margin? . What is Locars operating margin? c. What is Locars net proft margin? d. If Local Co had sn increase in seling expences of $300 000, how would that afact each od its margne? adminestrative expenses aro $500,000 and ts resesrch and devalopmert a. What is Local's gross margin? Locals gross matgrn is[B (Rourd to one decmal place ) b. What ie Local's operating marg? Local's operating marginvs%. Rourd to one decimal placeh c. What isLocal's nen proft margin? Local's net pr ft margin iB% tRond 10 two decimal places) d. H Local Co had an increase in seling expenses of $300,000, how woult that dfuct ach of es margia? (Salbct tha best choce bekow) B. Seling expense, do nd inect the gross margn, but the increase n such ..pensei m1 decrease the other magns but the increase in such exgenses wl sot atect the other margin D. Seling onpenses only afect the goss mangis, but the increass an such oxpenses wll nat aflect she uth er margins Kessler, RonExplanation / Answer
Answer a
Local 's Gross Margin
Gross Profit = Sales - Cost of Sales = $10 million - $6 million = $4 million
Gross Margin = Gross Profit / Sales = ($4 million / $10 million ) *100 = 40 %
Answer b
Local 's operating margin
Operating Profit = Gross Profit - Selling , general & admin expenses - R & D expenses - Depreciation
= $4 million - $0.5 million - $1 million - $1 million = $1.5 million
operating margin = Operating Profit / Sales = ($1.5 million / $10 million) *100 = 15 %
Answer c
Local 's net profit margin
Net Profit = Operating Profit * ( 1 - tax rate ) = $1.5 million *( 1 - 0.35) = $0.975 million
Net profit margin = Net Profit / Sales = ( $0.975 million / $10 million) *100 = 9.75 %
Answer d
B. Selling expenses do not effect the gross margin , but increase in such expense will decrease the other margin.
Explanation : If selling expenses increase by $300,000 than operating profit will decrease by $300,000. Therefore operating margin will decerease to ( $1.5 million - $0.3 million) / 10 million = 12 %.
Similarly decerese in operating profit by $0.3 million , will decrease the net profit also by [$0.3 million * ( 1 - 0.35)] = $0.195 million. Therefore net profit margin will decrease to ($0.975 million - $0.195 million) / $10 million = 7.8 %.
However there will be no impact on gross margin due to increse of selling expenses.