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Q4-2BTN

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Financial & Managerial Accounting
Found in: Page 221
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Key comparative figures for Apple and Google follow.

Apple

Google

$ millions

Current year

Prior year

Current year

Prior year

Net sales

$233,715

$182,795

$74,989

$66,001

Cost of sales

140,089

112,258

28,164

25,691

Required

1. Compute the dollar amount of gross margin and the gross margin ratio for the two years shown for each of these companies.

2. Which company earns more in gross margin for each dollar of net sales? How do they compare to the industry average of 45.0%?

3. Did the gross margin ratio improve or decline for these companies?

Answer

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Gross Margin

Gross margin can be defined as the profit generated by a business entity over the direct cost incurred in the business operation. It is reported in the income statement of the business entity.

Step 2: Calculation of gross margin and gross margin ratio

Gross margin:

Gross margin ratio:

Apple Co.:

Year

Gross margin

/

Sales

X

100

=

Gross margin ratio

Current

$93,626

/

$233,715

X

100

=

40.05%

Prior

$70,537

/

$182,795

X

100

=

38.58%

Google Co.:

Year

Gross margin

/

Sales

X

100

=

Gross margin ratio

Current

$46,825

/

$74,989

X

100

=

62.44%

Prior

$40,310

/

$66,001

X

100

=

61.07%

Step 3: Performance comparison

  1. Google is earning more gross margin than Apple.
  2. Compared with the industry average of 45%, Google is performing well, but Apple is not performing up to the mark.

Step 4: Interpretation of performance

The gross margin ratios for both Google and Apple have been improved in the current year as compared to the previous year.

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