Arco Is an Integrated Manufacturer in Capital-Intensive Industry Industry Analysts Anticipate the Following Annual Changes in Sales for Commodity-Level

Arco is an integrated manufacturer in capital-intensive industry.Nuwak manufactures more commodity-level products in the same industry at the lower end of the market and uses less capital-intensive processes.The following data describe sales and cost of products sold for both firms for Years 3 and 4.
$\begin{array}{|l|r|r|}\hline \text { Aamounts in millions) } & \text { Year 3 } & \text { Year 4 } \\\hline \text { Arco } & & \\\hline \text { Sales } & \$ 4,042 & \$ 5,217 \\\hline \text { Cost of Products Sold } & 3,887 & 4,554 \\\hline \text { Gross Profit } & \$ 155 & \$ 663 \\\hline \text { Gross Margin } & 3.8 \% & 12.7 \% \\\hline & & \\\hline \text { Nuwak } & & \\\hline \text { Sales } & \$ 6,266 & \$ 11,377 \\\hline \text { Cost of Products Sold } & 5,997 & 9,129 \\\hline \text { Gross Profit } & \$ 269 & \$ 2,248 \\\hline \text { Gross Margin } & 4.3 \% & 19.8 \%\\\hline\end{array}$
Industry analysts anticipate the following annual changes in sales for the next five years:
Year +1,5 percent increase; Year +2,10 percent increase; Year +3,20 percent increase; Year +4,10 percent decrease; Year +5,20 percent decrease.
Required
a.The analyst can sometimes estimate the variable cost as a percentage of sales for a
particular cost (for example,cost of products sold)by dividing the amount of the
change in the cost item between two years by the amount of the change in sales for
those two years.The analyst can then multiply the variable-cost percentage times
sales to estimate the total variable cost.Subtracting the variable cost from the total
cost yields an estimate of the fixed cost for that particular cost item.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 Arco and Nuwak in Year 4.
b.Discuss the structure of manufacturing cost (that is,fixed versus variable)for each
firm in light of the manufacturing process and type of product produced.
c.Using the analysts' forecasts of sales changes,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.
d.Why do the levels and variability of the gross margin percentages differ for these two
firms for Year +1 through Year +5?