Question

Apple’s and Google’s income statements in Appendix A both show increasing sales and cost of sales. The gross margin ratio can be used to analyze how well companies control costs as sales increase.

Required

1. Compute the gross margin ratio for Apple for each of the three most recent years.

2. Compute the gross margin ratio for Google for each of the three most recent years.

3. Do your computed gross margin ratios indicate good cost control for each company? Explain.

Short answer

1. Apple Co:

2013:37.62%

2014:38.59%

2015:40%

2.Google:

2013:60.39%

2014:61.07%

2015:62.44%

3. Google is efficient in controlling the cost incurred in the business.

Step-by-step solution

Definition of Gross Margin Ratio

The financial metric that provides information regarding the percentage of revenue that a business entity can convert into gross profit is known as the gross margin ratio. It determines the efficiency of the business entity in controlling direct costs.

Gross margin ratio for Apple Co

Particular	2013	2014	2015
Gross margin	$64,304	$70,537	$93,626
Net sales	$170,910	$182,795	$233,715
Gross margin ratio	37.62%	38.59%	40%

Working note:

The formula for calculating gross margin ratio:

$Grossmarginratio=\frac{Grossmargin}{Netsales}\times 100$

Gross margin ratio for Google Co

Particular	2013	2014	2015
Gross margin	$33,526	$40,310	$46,825
Net sales	$55,519	$66,001	$74,989
Gross margin ratio	60.39%	61.07%	62.44%

Working note:

1. The formula for calculating gross margin ratio:

$Grossmarginratio=\frac{Grossmargin}{Netsales}\times 100$

2. Calculation of gross margin

Particular	2013	2014	2015
Net sales	$55,519	$66,001	$74,989
Less: cost of revenue	(21,993)	(25,691)	(28,164)
Gross margin	$33,526	$40,310	$46,825

Cost Control

According to the gross margin ratio, it can be said that Google is efficient in controlling the cost because it can convert its 62% revenue into the gross margin. In comparison, Apple has converted only 40% of revenue into gross margin in recent years.