Question

Local Co. has sales of $10.4 million and cost of sales of $6.4 million. Its selling, general and administrative expenses are $550,000 and its research and development is $1.3 million. It has annual depreciation charges of $1.2 million and a tax rate of 25%.

a. What is Local's gross margin?
b. What is Local's operating margin?
c. What is Local's net profit margin?

Answer 1

Local Co. has a gross margin of $4 million, an operating margin of $2.15 million, and after accounting for depreciation and taxes, a net profit margin of $712,500.

Step-by-step explanation:

Calculating Local Co.'s Profit Margins

To answer the student's question, we need to calculate the gross margin, operating margin, and net profit margin for Local Co.

a. Gross Margin: Gross margin is calculated by subtracting the cost of sales from sales revenue. For Local Co., the gross margin is $10.4 million (sales) - $6.4 million (cost of sales) = $4 million.

b. Operating Margin: The operating margin is calculated by subtracting the operating expenses from the gross margin. Operating expenses include selling, general and administrative expenses, and research and development expenses. For Local Co., the operating margin is $4 million (gross margin) - $550,000 (selling, general and administrative expenses) - $1.3 million (research and development expenses) = $2.15 million.

c. Net Profit Margin: Net profit margin is the profit remaining after all expenses, including taxes and depreciation, are deducted from the revenue. For Local Co., the net profit before taxes is $2.15 million (operating margin) - $1.2 million (depreciation) = $950,000. After applying a tax rate of 25%, the net profit is $950,000 - ($950,000 * 25%) = $712,500.