Omega Corporation acquires 85 percent of Alpha Corporation’s voting stock on January 1, 2010, for $160 million in cash. Alpha’s net assets are fairly reported at $700 million at the date of acquisition. During 2010, Omega sells $750 million in merchandise to Alpha at a markup of 20 percent on cost. Alpha still holds $150 million of this merchandise in its ending inventory. Also during 2010, Alpha sells $180 million in merchandise to Omega at a markup of 25 percent on cost. Omega still holds $65 million of this merchandise in its ending inventory. Alpha reports 2010 net income of $75 million.

Required:

Calculate Omega’s equity in Alpha’s net income for 2010.

Assume Omega reports total 2010 sales revenue and cost of sales of $950 million and $760 million, respectively, while Alpha reports total 2010 sales revenue and cost of sales of $850 million and $680 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.