Question

Red Hot Inc. and Maverick Cycles Inc. are two competing motorcycle companies. While Red Hot's Cost of goods sold/Revenue is 63.4 percent, the Cost of goods sold/Revenue of Maverick Cycles is 54.2 percent. What do you infer from this financial data?

a- Red Hot is less efficient than Maverick Cycles in producing goods.
b- Red Hot has a higher profit margin than Maverick Cycles.
c- Red Hot and Maverick Cycles have achieved a competitive parity.
d- Red Hot is able to command a greater price premium for its products than Maverick Cycles.

Answer 1

a. Red Hot is less efficient than Maverick Cycles in producing goods.

Step-by-step explanation:

Let's look one by one.

Option B - Since Red Hot's Cost of goods sold/Revenue is 63.4%, therefore, gross margin is (100 - 63.4)% = 36.6%. On the other hand, the cost of goods sold/Revenue of Maverick Cycles is 54.2%. Therefore, gross margin is (100-54.2)% = 45.6%. So, the gross margin is higher in Maverick Cycles. Moreover, We do not have any operating expenses to ensure that Red Hot Inc. has a higher profit margin.

Option C - Competitive parity refers to the economies of scale or optimal expenses required to stay with the competition. Therefore, there is not enough information, as well.

Option D - Since the cost of goods sold is high for Red Hot, they cannot be able to command a higher price premium than Maverick Cycles.

Since B, C, D are not the right choice. We can say that option A is the right answer. Reason: As Red Hot's cost of goods sold is high, the price of the raw materials is also high. On the other hand, the cost of goods sold is just above 50% of its sales revenue. It means the cost is low for Maverick Company.