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Gross margin is a key financial metric that shows the difference between sales and the cost of goods sold (COGS). It indicates how much profit a company makes from its core activities before expenses related to selling, managerial tasks, and taxes are deducted. In simple terms, gross margin helps you understand how effectively a company turns sales into profits.
To calculate the gross margin, start by determining your total sales and then find out your variable costs. Variable costs are expenses that change in proportion to the volume of goods produced, such as materials and direct labor.
In this exercise, the total sales are projected at \(\\(860,000\), and variable costs are calculated as 60% of those sales. This leads to:

• Variable costs = \(60\% \times \\)860,000 = \\(516,000\)
• Gross margin = Total Sales - Variable Costs = \(\\)860,000 - \\(516,000 = \\)344,000\)

This calculation means the gross margin is \(\$344,000\), representing the funds available to cover other expenses.

Operating income, often referred to as operating profit or EBIT (Earnings Before Interest and Taxes), measures the profitability from regular business operations. It excludes all expenses associated with debts, taxes, or any other non-operating expenses.
The calculation of operating income begins with the gross margin. From this, fixed costs and depreciation are deducted. Fixed costs are the terms for periodic expenses that do not change within a certain period regardless of the level of production. Depreciation, on the other hand, accounts for the wear and tear on fixed assets over time.
In the given problem, fixed costs and depreciation are added together:

• Fixed costs + Depreciation = \(\\(195,000 + \\)86,000 = \\(281,000\)
• Operating Income = Gross Margin - (Fixed Costs + Depreciation) = \(\\)344,000 - \\(281,000 = \\)63,000\)

This implies that the company's core activities result in an operating income of \(\$63,000\), not accounting for tax expenses.

Net income is the "bottom line" for a company's earnings, calculated as total revenues minus total expenses, including taxes and other non-operating costs. It represents the actual profit managed to take home, showing how efficient a company is in managing its operating costs and overall expenses.
To determine net income, operating income must be adjusted for taxes. In this exercise, a tax rate of 35% is applied to the operating income:

• Tax = \(35\% \times \\(63,000 = \\)22,050\)
• Net Income = Operating Income - Tax = \(\\(63,000 - \\)22,050 = \\(40,950\)

The resulting net income is \(\\)40,950\), indicating what the business earns after covering all costs, showcasing its true profitability after tax obligations.