Question

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?

Short answer

Answer

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.

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%

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.

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.