Question 15(20 points) Cars Inc. and Automobile Inc. are two car manufactures. C
ID: 2608246 • Letter: Q
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Question 15(20 points) 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 XI (amounts in millions): Automobile Inc Cars Inc Sales S 4376 Sales S 2746 COGS S3785 (68.43%: variable) COGS S2553 (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. e. 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.Explanation / Answer
car Inc.
Automobile Inc.
a-
sales
4376
2746
less cost of goods sold-68.43% and 84.76%
2994.497
2327.51
contribution margin
1381.503
418.4904
As cost of goods sold is variable in nature so as the sales will increase, cost of goods sold will also increase in the same proportion and contribution rate will not change.
b
car Inc.
X1
X2
X3
X4
X5
sales = previous year sales*(1+growth rate)
4376
4463.52
4642.061
4781.323
4876.949
less cost of goods sold-68.43% and 84.76% of sales
2994.497
3054.387
3176.562
3271.859
3337.296
contribution margin
1381.503
1409.133
1465.499
1509.464
1539.653
c
Automobile Inc.
X1
X2
X3
X4
X5
sales
2746
2800.92
2912.957
3000.346
3060.352
less cost of goods sold-68.43% and 84.76%
2327.51
2374.06
2469.022
2543.093
2593.955
contribution margin
418.4904
426.8602
443.9346
457.2527
466.3977
d
There is no change in the profitability of both companies as cost of goods sold is variable in nature so as the sales will increase cost of goods sold will also increase in the same proportion and contribution rate will not change.
car Inc.
Automobile Inc.
a-
sales
4376
2746
less cost of goods sold-68.43% and 84.76%
2994.497
2327.51
contribution margin
1381.503
418.4904
As cost of goods sold is variable in nature so as the sales will increase, cost of goods sold will also increase in the same proportion and contribution rate will not change.
b
car Inc.
X1
X2
X3
X4
X5
sales = previous year sales*(1+growth rate)
4376
4463.52
4642.061
4781.323
4876.949
less cost of goods sold-68.43% and 84.76% of sales
2994.497
3054.387
3176.562
3271.859
3337.296
contribution margin
1381.503
1409.133
1465.499
1509.464
1539.653
c
Automobile Inc.
X1
X2
X3
X4
X5
sales
2746
2800.92
2912.957
3000.346
3060.352
less cost of goods sold-68.43% and 84.76%
2327.51
2374.06
2469.022
2543.093
2593.955
contribution margin
418.4904
426.8602
443.9346
457.2527
466.3977
d
There is no change in the profitability of both companies as cost of goods sold is variable in nature so as the sales will increase cost of goods sold will also increase in the same proportion and contribution rate will not change.
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