   Chapter 5, Problem 77E ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

#### Solutions ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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# Ratio AnalysisThe following information was taken from Logsden Manufacturing’s trial balances as of December 31, 2018, and December 31, 2019. Required:1. Calculate the gross profit margin and operating margin percentage for 2019. ( Note: Round answers to two decimal places.)2. Assuming that all of the operating expenses are fixed (or, won’t change as sales increase or decrease), what will be the operating margin percentage if sales increase by 25%?

To determine

(a)

Gross profit margin ratio:

The gross margin ratio is a type of profitability ratio which is used to measure the returns and earning after direct expenses and compute the ratio in respect to the sales of the business.

Operating margin:

The operating margin is the ratio which is used to measure the efficiency of the operations of the business. It is computed by dividing the operating income with the net sales.

To calculate:

The gross profit margin and operating margin for 2019.

Explanation

The Logsden Manufacturing has a net sale of $2,67,000 ($2,79,000$12,000), cost of goods sold of$1,44,000 and operating income is of \$25,000. This is given in the question.

The computation of gross profit margin is as follows:

Gross Profit Margin=Gross ProfitNet Sales×100=( Net SalesCost of goods sold)Net Sales

To determine

(b)

Operating margin:

The operating margin is the ratio which is used to measure the efficiency of the operations of the business. It is computed by dividing the operating income with the net sales.

To calculate:

The operating margin ratio.

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