Xi Corporation acquires 60 percent of Omicron Corporation’s voting stock on August 1, 2015, for $110 million in cash. Omicron’s net assets are fairly reported at $450 million at the date of acquisition. During 2015, Xi sells $500 million in merchandise to Omicron at a markup of 20 percent on cost. Omicron still holds $100 million of this merchandise in its ending inventory. Also during 2015, Omicron sells $130 million in merchandise to Xi at a markup of 20 percent on cost. Xi still holds $40 million of this merchandise in its ending inventory. Omicron reports 2015 net income of $50 million.

Required:

Calculate Xi’s equity in Omicron’s net income for 2015.

Assume Xi reports total 2015 sales revenue and cost of sales of $700 million and $560 million, respectively, while Omicron reports total 2015 sales revenue and cost of sales of $600 million and $500 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.