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.

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

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.

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