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10.11 IDENTIFYING THE COST STRUCTURE AND PROJECTING GROSS MARGINS FOR CAPITAL-INTENSIVE, CYCLICAL… 1 answer below » 10.11 IDENTIFYING THE COST STRUCTURE AND PROJECTING GROSS MARGINS FOR CAPITAL-INTENSIVE, CYCLICAL BUSINESSES. AK Steel is an integrated 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 stainless 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. View complete question » 10.11 IDENTIFYING THE COST STRUCTURE AND PROJECTING GROSS MARGINS FOR CAPITAL-INTENSIVE, CYCLICAL BUSINESSES. AK Steel is an integrated 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 stainless 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 data describe sales and cost of products sold for both firms for Years 3 and 4. ($ amounts in millions) Year 3 Year 4 AK Steel Sales $4,042 $ 5,217 Cost of Products Sold $3,887 $ 4,554 Gross Profit $ 155 $ 663 Gross Margin 3.8% 12.7% Nucor Sales $6,266 $11,377 Cost of Products Sold $5,997 $ 9,129 Gross Profit $ 269 $ 2,248 Gross Margin 4.3% 19.8% Industry analysts anticipate the following annual changes in sales for the next five years: Year +1, 5 percent increase; Year +2, 10 percent increase; Year +3, 20 percent increase; Year +4, 10 percent decrease; Year +5, 20 percent decrease. Required a. The analyst can sometimes estimate the variable cost as a percentage of sales for a particular cost (for example, cost of products sold) by dividing the amount of the change in the cost item between two years by the amount of the change in sales for those two years. The analyst can then multiply the variable-cost percentage times sales to estimate the total variable cost. Subtracting the variable cost from the total cost yields an estimate of the fixed cost for that particular cost item. Follow this pro- cedure 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? View less » Dec 08 2015 04:22 PM
