Calculating C and I for Common Size Analysis and Future Projection

In: Business and Management

Submitted By bratil
Words 958
Pages 4

Based on the Common Size Income Statement and observation of cost behaviors I:
Considered COGS as variable as it directly correlates to the amount of products that we sell. We can also see that COGS to Revenue percentage is almost the same meaning the relationship between is constant, thus the cost is variable. I used the average relationship between the COGS and Revenue for the previous years to project the increase and decrease in revenue.

Selling expenses area variable and based of sales, we can deduct if following the logical connection to “sales” and visual connection through the Common Size Income Statement. To calculate it I used the average relationship between the Selling expenses and Revenues.

General and Administrative are fixed, and even though in real world environment the company that loses money would probably try to lower the fixed costs by shrinking it’s personnel. Also generally the more the business grows the more general and administrative expenses there would be, because the company would most likely to hire new people in order to accommodate the growth and increase capacity, but I treated it as a fixed cost as I could also observe it’s behavior from the income statement. To calculate it I used an average annual cost.

Interest Expense I classified as variable as I observed it’s behavior I also noticed that that rate the interest is growing is 0.02% each successful year, thus I used that rate to calculate the increase in interest during the 10% growth and decrease using the same rate to account for 10% loss. The variability of this cost is based, in my opinion, on business strategy and capital allocation, and the interest rate on the market compared to the WACC, thus theoretically it is possible that the company would borrow more when it’s losing money, but it also possible that it would borrow less to lower it’s interest…...

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