Local Co. has sales of $ 10.4 million and cost of sales of $ 5.9 million. Its selling, general and administrative expenses are $ 480 comma 000 and its research and development is $ 1.4 million. It has annual depreciation charges of $ 1.3 million and a tax rate of 35 %. a. What is Local's gross margin? (answer in %, Round to one decimal place.)

b. What is Local's operating margin? (answer in %, Round to one decimal place.)

c. What is Local's net profit margin? (answer in %, Round to two decimal places.)

(a) 43.26%

(b) 12.69%

(c) 8.25%

Explanation:

(a) Gross profit:

= Sales - cost of sales

= $10,400,000 - $5,900,000

= $4,500,000

Local's gross margin:

= (Gross profit : Total sales) * 100

= ($4,500,000 : $10,400,000) * 100

= 0.4326 * 100

= 43.26%

(b) Local's operating margin:

= [ (Gross profit - selling, general and administrative expenses-Depreciation-Research and development) : Total sales] * 100

= [ ($4,500,000 - $480,000 - $1,300,000 - $1,400,000) : $10,400,000] * 100

= ($1,320,000 : $10,400,000) * 100

= 0.1269 * 100

= 12.69%

(c) Operating income:

= Sales - cost of sales - selling, general and administrative expenses - Depreciation - Research and development

= $10,400,000 - $5,900,000 - $480,000 - $1,300,000 - $1,400,000

= $1,320,000

Taxes = Operating income * tax rate

= $1,320,000 * 35%

= $462,000

Local's net profit margin:

= [ (Operating income - Taxes) : Sales] * 100

= [ ($1,320,000 - $462,000) : $10,400,000] * 100

= ($858,000 : $10,400,000) * 100

= 0.0825 * 100

= 8.25%