Question

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

Lake Region Coastal Region
Sales revenue $4,020,000 $13,110,000
Cost of sales 2,625,000 6,470,000
Allocated corporate overhead 241,200 786,600
Other general and administration 548,900 3,710,000

The results for year 2 have just been posted.
Lake Region Coastal Region
Sales revenue $4,020,000 $9,520,000
Cost of sales 2,625,000 4,840,000
Allocated corporate overhead 301,500 714,000
Other general and administration 549,000 3,710,000

Required:
a. Compute divisional operating income for the two divisions.
b. What are the gross margin and operating margin percentages for both divisions?

Answer 1

Answer: See explanation

Step-by-step explanation:

a. Compute divisional operating income for the two divisions.

For Lake region:

Sales: = $4,020,000

Less: cost of goods sold = $2,625,000

Gross margin = $1,395,000

Less: Allocated corporate overhead = $301,500

Less: Other general and administration = $549,000

Operating income = $544500

For Coastal Region:

Sales: = $9,520,000

Less: cost of goods sold = $4,840,000

Gross margin = $4,680,000

Less: Allocated corporate overhead = $714,000

Less: Other general and administration = $3,710,000

Operating income = $256000

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

Gross margin percentage for Lake region:

= Gross margin/Sales

= $1,395,000/$4,020,000 × 100

= 34.7%

Gross margin percentage for Coastal region

= Gross margin/Sales

= $4,680,000/$9,520,000 × 100

= 49.2%

Operating margin percentage for Lake region

= Operating income / Sales × 100

= $544500/$4,020,000 × 100.

= 13.5%

Operating margin percentage for Coastal region

= $256000/$9,520,000 × 100

= 2.69%