Financial Analysis Report: AK Steel and Nucor Case Study

This financial analysis report presents a comprehensive comparison of AK Steel and Nucor, focusing on their cost structures, manufacturing costs, and projected financial performance over a five-year period. The analysis begins by calculating key financial metrics, including variable and fixed costs, based on provided sales and cost of products sold data for Years 3 and 4. The report then delves into the structure of manufacturing costs, highlighting the differences between the two companies and their implications for profitability. Furthermore, the assignment includes a detailed projection of sales, cost of products sold, gross profit, and gross margin for each firm over the next five years, incorporating analyst forecasts of sales growth rates. Finally, the report compares the gross margins of both companies, considering factors such as manufacturing cost structures, customer base, and bargaining power, to provide a nuanced understanding of their financial performance and strategic positioning within the industry. The report concludes with references to support the analysis.

Running Head: Accounting financial analysis report
Accounting financial analysis report
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Accounting financial analysis report
Contents
Module Six Activity Worksheet.................................................................................................1
A. Cost Structure for both the firms:................................................................................1
B. Structure of Manufacturing Cost for both the firms:...................................................3
C. Projected Financial Information for both the firms for next five years:......................4
D. Gross Margin Comparison:.........................................................................................6
References..................................................................................................................................8

Accounting financial analysis report
Module Six Activity Worksheet
The following table shows the case-study data regarding the sales and costs for AK Steel
and Nucor for Years 3 and 4:
( $ amounts in millions) Year 3 Year 4
AK Steel
Sales $4,042 $5,217
Cost of products sold $3,887 $4,554
Gross profit $155 $ 663
Gross margin 3.8% 12.7%
Nucor
Sales $6,266 $11, 377
Cost of products sold $5,997 $9,129
Gross profit $269 $2,248
Gross margin 4.3% 19.8%
A. Cost Structure for both the firms:
1. Variable Cost per Dollar of Sales = Change in Cost of Products Sold / Change in
Sales:
For AK Steel: ($4,554-$3,887) / ($5,217-$4,042) = $0.57
For Nucor: ($9,129-$5,997) / ($11,377-$6,266) = $0.61
2. Total Variable Cost = Variable Cost per Dollar of Sales * Sales:
Year 3 Year 4
AK Steel $0.57*$4,042= $2,294.48 $0.57*$5,217= $2,961.48
Nucor $0.61*$6,266= $3,839.78 $0.61*$11,377= $6,971.78
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Accounting financial analysis report
3. Total Fixed Cost = Total Cost of Product Sold – Total Variable Cost:
Year 3 Year 4
AK Steel $3,887-$2,294.48= $1,592.52 $4,554-$2,961.48= $1,592.52
Nucor $5,997-$3,839.78= $2,157.22 $9,129*$6,972.78=
$2,157.22
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Accounting financial analysis report
B. Structure of Manufacturing Cost for both the firms:
Year 4 Variable cost
as a percentage
of sales
Fixed cost
as a
percentage
of sales
Total variable
costs
Total fixed
costs
AK Steel 56.77% 30.53% $2,961.48 $1,592.52
Nucor 61.28% 18.96% $6,971.78 $2,157.22
The structure of manufacturing costs tells about the relative proportion of fixed costs and
variable costs incurred by a company (Drury, 2018). For a more capital intensive
company relative proportion of fixed costs is higher than the less capital intensive
companies. AK Steel is more capital intensive in comparison to Nucor as AK Steel
produces higher level commercial products using advanced technology, high end
equipment and modern manufacturing units. This also requires high investments in
R&D and skills up gradation of its employees that increase the overall fixed costs
(Transportgeography, n.d.). The relative proportion of fixed costs (variable costs) is
higher (lower) for AK Steel than Nucor. So, the AK Steel needs to generate very high
sales to start earning profits but afterwards the proportional increase in profit is higher
when sales increases as compared to Nucor.
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Accounting financial analysis report
C. Projected Financial Information for both the firms for next five years:
Time period Year + 1 Year +2 Year +3 Year +4 Year +5
Analyst’s forecasts
of sales growth
rates for both the
firms for next five
years: Year +1
through Year +5.
5% 10% 20% -10% -20%
AK Steel Year +1 Year +2 Year +3 Year +4 Year +5
Sales $5,477.85 $6,025.64 $7,230.76 $6,507.69 $5,206.15
Less Cost of
Product
Sold:
Variable
Cost (0.568
of Sales)
$3,111.42 $3,422.56 $4,107.07 $3,696.37 $2,957.09
Fixed Costs $1,592.52 $1,592.52 $1,592.52 $1,592.52 $1,592.52
Total Costs of
Products
Sold
$4,703.94 $5,015.08 $5,699.59 $5,288.89 $4,549.61
Gross Profit $773.91 $1,010.55 $1,531.17 $1,218.80 $656.54
Gross Margin % 14.13% 16.77% 21.18% 18.73% 12.61%
Nucor Year +1 Year +2 Year +3 Year +4 Year +5
Sales $11,945.85 $13,140.44 $15,768.52 $14,191.67 $11,353.34
Less Cost of
Product
Sold:
Variable
$7,322.81 $8,055.09 $9,666.10 $8,699.49 $6,959.59
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Accounting financial analysis report
Cost
(0.613 of
Sales)
Fixed Costs $2,157.22 $2,157.22 $2,157.22 $2,157.22 $2,157.22
Total Costs of
Products
Sold
$9,480.03 $10,212.31 $11,823.32 $10,856.71 $9,116.82
Gross Profit $2,465.82 $2,928.13 $3,945.20 $3,334.96 $2,236.52
Gross Margin % 20.64% 22.28% 25.02% 23.50% 19.70%
D. Gross Margin Comparison:
Average Gross margin% over Standard deviation of the Gross
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Accounting financial analysis report
forecasted period (Level) margin% over forecasted period
(Variability)
AK Steel 16.68% 3.45%
Nucor 22.23% 2.14%
In spite of the same sales forecast, the levels and variability of gross margin percentage
differ for these two firms because of the difference in the structure of manufacturing
cost and difference in their customers and business scale. So, a proper gross margin
variance analysis is required to identify the underlying factors (Hogg, n.d.). For AK
Steel, the average gross profit margin and its variability given by standard deviation
for the forecasted period is 16.68% and 3.45% respectively. For Nucor, these values
are 22.23% and 2.14%. The lower relative proportion of fixed costs led to higher
levels of gross margin percentage in Nucor. Another reason for this can be the low
bargaining power of Nucor's customers because they belong to lower end of the
market and individual orders of these customers are smaller (Harvard Business
School, n.d.). In case of AK Steel, business operations are more capital intensive
because relative proportion of fixed cost is high. So, this decreases the overall level of
gross margin percentage. Another factor responsible for this is the high bargaining
power of its industrial customers.
The reason for the higher variability in the gross margin percentage of AK steel as the sales
changes is the higher incremental economies of scale benefits for the company when
sales increase and vice-versa when sales decrease. This is because AK Steel business
scale is lower than Nucor (Amadeo, 2019). Also due to AK Steel’s relative lower
variable costs, when the sales increase the proportional increase in the total costs is
less in AK steels in comparison to Nucor because the fixed cost remains the same but
the increase in variable costs is low in AK steels. This results in higher increase in its
gross margin percentage and vice-versa when sales decrease.
Considering the same sales forecasts as above, if there is 4-5% increase in the gross margin
percentage: for AK Steel total sales increase by 20%, variable costs increases by 20%
and total cost increases by 14%; for Nucor total sales increase by 32%, variable costs
increases by 32% and total cost increases by 25%. So, AK Steel needs lower increase
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Accounting financial analysis report
in its sales than Nucor to achieve the same increase in gross margin percentage
because relative proportion of variable costs is lower for AK steel.
References
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Accounting financial analysis report
Amadeo, K. (2019). Economies of Scale. The Balance. Retrieved 3rd July 2019 from
https://www.thebalance.com/economies-of-scale-3305926.
Drury, C. (2018). Management and Cost Accounting (10th ed.). London: Cengage Learning.
Harvard Business School. (n.d.). The Five Forces. Retrieved 3rd July 2019 from
https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx.
Hogg, J. (n.d.). Getting the Most from Margin Variance Analysis. Thekinigroup. Retrieved
3rd July 2019 from https://thekinigroup.com/gross-margin-variance-analysis/.
Transportgeography. (n.d.). Manufacturing Cost Structure. Retrieved 3rd July 2019 from
https://transportgeography.org/?page_id=4353.
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