Two consumer staple companiesSwiss chocolate specialist Lindt and global food producer Nestlhave costs that are constantly affected

Two consumer staple companies—Swiss chocolate specialist Lindt and global food producer Nestlé—have costs that are constantly affected by inflation and deflation.

Exhibit 29 presents a common size analysis.

i. A ssume inflation of 10% for all costs (except depreciation) and that the companies are not able to pass on this increase through higher prices (total revenues will remain constant).
A. Calculate the gross profit margin for each company. Which company will experience the greatest reduction in gross profit margin?
B. Calculate the operating profit margin for each company. Which company will experience the greatest reduction in operating profit (EBIT) margin?
ii. Assume inflation of 10% only for the raw material costs (reflected in COGS) and that the companies are not able to pass on this increase through higher prices.
Which company will be most affected negatively in terms of gross profit margin and operating profit margin?

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EXHIBIT 29 Common Size Analysis for Nestl and Lindt Nestl Lindt Net sales 100% 100% COGS 50% 36% Gross margin 50% 64% SG&A 31% 47% Depreciation 3% 4% EBIT 16% 13% Raw materials 22% 22% Packaging 12% 10% Other COGS 16% 4% Total COGS 50% 36%