# The Cost Structure And Projecting Gross Margins

Prompt: First, review the Module Six resources.

Then revisit Chapter 10 in the textbook, which was assigned in Module Three. 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 the questions below in the Module Six Activity Worksheet. Refer to the textbook and other course materials to support your responses.

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A. Cost Structure: Compute the cost structure for each firm. You will need to calculate three variables for both companies:

1. Variable Cost per Dollar of Sales = Change in Cost of Products Sold / Change in Sales

2. Total Variable Cost = Variable Cost per Dollar of Sales * Sales

3. Total Fixed Cost = Total Cost of Product Sold – Total Variable Cost

B. Structure of Manufacturing Cost: In one paragraph, compare the structure of manufacturing costs for each firm. C. 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 in the Module Six Activity Worksheet is recommended. D. 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?)

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