Pro Forma Income Statements

Cars Inc. and Automobile Inc. are two car manufactures. Cars Inc. manufactures high quality cars whereas Automobile Inc. manufactures lower end cars. Cars Inc. is more capital intensive than Automobile Inc., and relies more on fixed assets for its production. You are given the following information about the companies for year X1 (amounts in millions):

Cars Inc:

Sales $5,376 COGS $4,785(68.43%-variable)

Automobile Inc:

Sales $3,746 COGS $3,553(84.76%-variable)

The car manufacturing industry expects the following increases in sales in the following years (all compared to the previous year): year X2: 2%, year X3: 4%, year X4: 3%, year X5: 2%.

a. Comment on the cost structure for both companies and on the likely effect of the cost structure and type of cars manufactured on the price and gross margin of both companies.

b. Prepare a forecast of Cars Inc. sales, COGS, gross margin for years X2 to X5 based on the information given above.

c. Prepare a forecast of Automobile Inc. sales, COGS, gross margin for years X2 to X5 based on the information given above.

d. Comment on your results compared to your answer in part a.