Question 1520 points Cars Inc and Automobile Inc are two car

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.

Solution

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.