Delta Corporation acquires 95 percent of Epsilon Corporation’s voting stock on March 1, 2008, for $180 million in cash. Epsilon’s net assets are fairly reported at $800 million at the date of acquisition. During 2008, Delta sells $850 million in merchandise to Epsilon at a markup of 30 percent on cost. Epsilon still holds $170 million of this merchandise in its ending inventory. Also during 2008, Epsilon sells $200 million in merchandise to Delta at a markup of 15 percent on cost. Delta still holds $75 million of this merchandise in its ending inventory. Epsilon reports 2008 net income of $85 million.

Required:

Calculate Delta’s equity in Epsilon’s net income for 2008.

Assume Delta reports total 2008 sales revenue and cost of sales of $1,050 million and $840 million, respectively, while Epsilon reports total 2008 sales revenue and cost of sales of $950 million and $760 million, respectively. Compute each company’s gross margin on sales as reported following U.S. GAAP. Now compute gross margin on sales again, excluding intercompany sales. Comment on the results.