The following income statements were drawn from the annual reports of the Denver Company and the Reno Company:
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| | Denver* | Reno* |
| Net sales | $ | 34,700 | | $ | 87,400 | |
| Cost of goods sold | | (17,990 | ) | | (63,430 | ) |
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| Gross margin | | 16,710 | | | 23,970 | |
| Less: Operating exp. | | | | | | |
| Selling and admin. exp. | | (12,240 | ) | | (18,834 | ) |
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| Net income | $ | 4,470 | | $ | 5,136 | |
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| *All figures are reported in thousands of dollars. |
| a-1. |
Compute the gross margin percentages and return-on-sales ratios of Denver and Reno.
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Explanation:
a-1.
| Gross Margin Percentages: |
| Denver: | 48% | ($16,710 ÷ $34,700) |
| Reno: | 27% | ($23,970 ÷ $87,400) |
| Denver: | 13% | ($4,470 ÷ $34,700) |
| Reno: | 6% | ($5,136 ÷ $87,400) |
a-2.
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Based
on the gross margin percentages, Denver is the “high-end retailer.”
Denver is obviously marking up the price of merchandise by a greater
percentage than Reno.
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b.
| Denver: | 29% | ($4,470 ÷ $15,200) |
| Reno: | 24% | ($5,136 ÷ $21,400) |
From the viewpoint of the owners, Denver was more profitable.
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