10.11 Identifying the Cost Structure and Projecting Gross Margins for Capital-Intensive, Cyclical Businesses. AK Steel is an inte- grated manufacturer of high-quality steel and steel products in capital-intensive steel mills. AK Steel produces flat-rolled carbon, stainless and electrical steel products, and carbon and stain- less tubular steel products for automotive, appliance, construction, and manufacturing markets. Nucor manufactures more commodity-level steel and steel products at the lower end of the market in less capital-intensive mini-mills. The following selected hypothetical data describe sales and cost of products sold for both firms for Years 3 and 4. Year 3 Year 4 ($ amounts in millions) AK Steel Sales Cost of products sold Gross profit Gross margin $4,042 $3,887 $ 155 3.8% $ 5,217 $ 4554 $ 663 12.796 Nucor Sales $6,266 $11,377 Cost of products sold $5,997 $ 9,129 Gross profit $ 269 $ 2.248 Gross margin 43% 19.896 Industry analysts anticipate the following annual changes in sales for the next five years: Year +1,5% increase: Year +2, 10% increase: Year +3, 20% increase; Year +4, 10% decrease Year +5, 20% decrease. REQUIRED a. Estimate the variable cost as a percentage of sales for the cost of products sold by divid- ing the amount of the change in the cost of products sold by the amount of the change in sales. Then multiply the variable-cost percentage times sales to estimate the total vari- able cost. Subtract the variable cost from the total cost to estimate the fixed cost for cost of products sold. Follow this procedure to estimate the manufacturing cost structure (variable cost as a percentage of sales, total variable costs, and total fixed costs) for cost of products sold for both AK Steel and Nucor in Year 4. b. Discuss the structure of manufacturing cost (that is, fixed versus variable) for each firm in light of the manufacturing process and type of steel produced c. Using the analysts' forecasts of sales growth rates, compute the projected sales, cost of products sold, gross profit, and gross margin (gross profit as a percentage of sales) of each firm for Year +1 through Year +5. d. Why do the levels and variability of the gross margin percentages differ for these two firms for Year +1 through Year +5? styx 10.11 Identifying the Cost Structure and Projecting Gross Margins for Capital-Intensive, Cyclical Businesses. AK Steel is an inte- grated manufacturer of high-quality steel and steel products in capital-intensive steel mills. AK Steel produces flat-rolled carbon, stainless and electrical steel products, and carbon and stain- less tubular steel products for automotive, appliance, construction, and manufacturing markets. Nucor manufactures more commodity-level steel and steel products at the lower end of the market in less capital-intensive mini-mills. The following selected hypothetical data describe sales and cost of products sold for both firms for Years 3 and 4. Year 3 Year 4 ($ amounts in millions) AK Steel Sales Cost of products sold Gross profit Gross margin $4,042 $3,887 $ 155 3.8% $ 5,217 $ 4554 $ 663 12.796 Nucor Sales $6,266 $11,377 Cost of products sold $5,997 $ 9,129 Gross profit $ 269 $ 2.248 Gross margin 43% 19.896 Industry analysts anticipate the following annual changes in sales for the next five years: Year +1,5% increase: Year +2, 10% increase: Year +3, 20% increase; Year +4, 10% decrease Year +5, 20% decrease. REQUIRED a. Estimate the variable cost as a percentage of sales for the cost of products sold by divid- ing the amount of the change in the cost of products sold by the amount of the change in sales. Then multiply the variable-cost percentage times sales to estimate the total vari- able cost. Subtract the variable cost from the total cost to estimate the fixed cost for cost of products sold. Follow this procedure to estimate the manufacturing cost structure (variable cost as a percentage of sales, total variable costs, and total fixed costs) for cost of products sold for both AK Steel and Nucor in Year 4. b. Discuss the structure of manufacturing cost (that is, fixed versus variable) for each firm in light of the manufacturing process and type of steel produced c. Using the analysts' forecasts of sales growth rates, compute the projected sales, cost of products sold, gross profit, and gross margin (gross profit as a percentage of sales) of each firm for Year +1 through Year +5. d. Why do the levels and variability of the gross margin percentages differ for these two firms for Year +1 through Year +5? styx
