TRUE OR FALSE : COGS is expected to be directly proportional to sales revenue?
Supposedly, if I make 100M in sales this year and my COGS was 60M, then next year when I make 110M, my COGS will be 66M.I read this statement to be true in a textbook. Does COGS take into account fixed costs? What happens if you’re in a capital-intensive business where you have to pay a lot of money to build a factory and install tons of machinery?
COGS include variable (e.g. material) and fixed costs (e.g. machine depreciation/blue collar salaries) so that the relationship is not totally proportional. However, you can assume that at least for a manufacturing company most costs in COGS are variable or semi variable. So, if you do not have huge jumps up- or downwards in revenues it could be reasonable to assume kind of a proportional relationship. This is what is often done in financial models based on revenue driven drivers.