For this practice activity, we will use the End of Chapter exercise from pp. 703–704: “10.11 Identifying the Cost Structure and Projecting Gross Margins for Capital-Intensive, Cyclical Businesses.” This includes the AK Steel case study. After reading the case study, answer questions A–D below. Refer to the textbook and other course materials to support your responses.
- Cost Structure: Compute the cost structure for each firm. You will need to calculate three variables for both companies:
- Variable Cost per Dollar of Sales = Change in Cost of Products Sold / Change in Sales:
- Total Variable Cost = Variable Cost per Dollar of Sales * Sales:
- Total Fixed Cost = Total Cost of Product Sold – Total Variable Cost:
- Structure of Manufacturing Cost: In one paragraph, compare the structure of manufacturing costs for each firm:
- Projected Financial Information: 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. Using the table below or a similar spreadsheet is recommended.
| AK Steel | Year +1 | Year +2 | Year +3 | Year +4 | Year +5 |
| Sales | |||||
| Less Cost of Product Sold: Variable Cost (0.568 of Sales) | |||||
| Fixed Costs | |||||
| Total Costs of Products Sold | |||||
| Gross Profit | |||||
| Gross Margin % | |||||
| Nucor | Year +1 | Year +2 | Year +3 | Year +4 | Year +5 |
| Sales | |||||
| Less Cost of Product Sold: Variable Cost (0.613 of Sales) | |||||
| Fixed Costs | |||||
| Total Costs of Products Sold | |||||
| Gross Profit | |||||
| Gross Margin % | |||||
- Gross Margin Comparison: In one to two paragraphs, explain why the levels and variability of the gross margin percentages differ for these two firms for Year +1 through Year +5. Provide an example comparing the effect of the change in gross margin. (For example, if gross margin changed from 25% to 35%, what would it mean for each company?)
