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midtermfsaspr2016c_Goodyear_solutions1.doc-Financial Statement Analysis Midterm—Proposed Solutions Spring
Page 6


Page 7
7.
Commodity pricing
8 points
Goodyear provides the following information:
Commodity Price Risk
The raw materials costs to which our operations are principally exposed include
the cost of natural rubber, synthetic rubber, carbon black, fabrics, steel cord and
other petrochemical-based
commodities.
Approximately two-thirds of our raw
materials are oil-based derivatives, the cost of which may be affected by fluctuations in
the price of oil.
Oil prices have fallen in the last year.
How is that likely to affect its revenues?
Explain your answer.
The lower oil prices will cut the cost of producing the firm’s products.
The oil
price declines will also reduce the cost of producing the products of other tire makers.
Revenues are likely to fall because the firm is likely to have to pass on some of
the cost savings from the reduced costs.
Competition from other tire makers will tend to
force that.
We saw this pattern of passing on at least part of cost savings in the Cisco
case and it has less competition than tire makers do.
Cutting prices will lead to selling more tires.
Since the other tire manufacturers
are also likely to cut their prices, the firm cannot expect to steal business.
Any additional
revenues would come from the overall level of customers purchasing tires.
I would guess
that tire demand is relatively inelastic (does not change much with the price) because
most people replace tires when the previous ones wear out.
That would tend to lead to
revenues falling because the price declines would dominate the volume increase.


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