Question

Suppose COGS is currently 67% of sales and over the next year sales growth by 5% and growth COGS is 3%.

Do you predict the COGS as a percent of sales will increase, increase, or remain the same over the next year? Explain and verify your intuition by calculating the COGS as a percent of sales at year-end.  

Answer 1

The COGS will decrease as the percentage of sales

The Sales has grown by 5% while the COGS has grown only 3% which shows that there will be decrease in the COGS as a percent to sales as the percentage increase in COGS is less than sales.

For Example

Let Sales = 100

COGS = 67% * 100

= 67

Percentage of Sales = 0.67

Now, Sales = 100 * (1+5%)

= 105

COGS = 67*(1+3%)

= 69.01

As a Percentage of sales = 69.01/105

Percentage of sales = 0.6572

So, The Intuition is correct