Here is the common size analysis of company A and B.

| Company A | Company B
Net sales: | 100% | 100%
COGS: | 60% | 55%
SG&A: | 20% | 25%
Depreciation: | 5% | 5%
EBIT: | 15% | 15%

Assume there is an inflation of 10% for raw materials. The companies cannot pass on the increase through higher prices. Which company will experience more negative effect caused by the inflation?

A. Company A.
B. Company B.
C. The impact will be the same for both companies.

Correct Answer: A

The company with a higher COGS component will experience the more negative effect. COGS of Company A's is 60%, which is higher than COGS of Company B's.