# [Solution]Identifying the Cost Structure and Projecting Gross Margins for Capital-Intensive, Cyclical Businesses.

Identifying the Cost Structure and Projecting Gross Margins for Capital-Intensive, Cyclical Businesses. AK Steel is an integrated manufac-turer of high-quality steel and steel products in…

Identifying the Cost Structure and Projecting Gross Margins for Capital-Intensive, Cyclical Businesses. AK Steel is an integrated manufac-turer 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 manufac-tures more commodity-level steel and steel products at the lower end of the market in less capital-intensive mini-mills. The following selected hypothetical data describe sales and cost of products sold for both firms for

(\$ 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

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 þ1, 5% increase; Year þ2, 10% increase; Year þ3, 20% increase; Year þ4, 10% decrease; Year þ5, 20% decrease.
REQUIRED a. Estimate the variable cost as a percentage of sales for the cost of products sold by divid-ing the amount of the change in the cost of products sold by the amount of the change in sales. Then multiply the variable-cost percentage times sales to estimate the total vari-able cost. Subtract the variable cost from the total cost to estimate the fixed cost for cost of products sold. Follow this procedure 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.

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.
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 þ1 through Year þ5.
Why do the levels and variability of the gross margin percentages differ for these two firms for Year þ1 through Year þ5?

Assignment status: Solved by our experts

>>>Click here to get this paper written at the best price. 100% Custom, 0% plagiarism.<<<