Xi Corporation acquires 20 percent of Omicron Corporation’s voting stock on August 1, 2003, for $230 million in cash. Omicron’s net assets are fairly reported at $1,050 million at the date of acquisition. During 2003, Xi sells $1,100 million in merchandise to Omicron at a markup of 30 percent on cost. Omicron still holds $220 million of this merchandise in its ending inventory. Also during 2003, Omicron sells $250 million in merchandise to Xi at a markup of 15 percent on cost. Xi still holds $100 million of this merchandise in its ending inventory. Omicron reports 2003 net income of $110 million.

Required:

Calculate Xi’s equity in Omicron’s net income for 2003.

Assume Xi reports total 2003 sales revenue and cost of sales of $1,300 million and $1,040 million, respectively, while Omicron reports total 2003 sales revenue and cost of sales of $1,200 million and $960 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.