The following data is available on two companies that operate in the same industry:
Metric ($ millions)
Company X
Company Y
Sales
11.2
14.5
Cost of goods sold
5.7
7.7
Administration costs
1.9
2.2
Interest expense
0.3
0.7
Research & development expenses
1.5
1.7
Which of the following statements is most appropriate? Better margin performance will be reported by:
Y at the gross margin level and X at the operating margin level. Y at both the gross margin and operating margin levels. X at the gross margin level and Y at the operating margin level. Question not answered
Common size statements offer a convenient way to compare companies of different magnitudes. Company X reports better (higher) gross margin performance. Company Y reports better (higher) operating margin performance.
Metric (common size)
Company X
Company Y
Comparison
Sales
100%
100%
Cost of goods sold
51
53
Gross margin (GM)
49
47
X’s GM is higher
Administrative costs
17
15
Research & development expenses
13
12
Operating margin (OM)
19
20
Y’s OM is higher
CFA Level I
How did they get the 51 (COGS X) and the other numbers in the 2nd chart? This common size statement is tripping me up for some odd reason…