"If Ford [...] had used activity-based costing, they would have realized early on the utter futility of their competitive blitzes of the past few years, which offered new-car buyers spectacular discounts and hefty rewards" (Drucker, 2003).
Unlike absorption costing, marginal costing uses the traditional division into direct, indirect, fixed and variable costs. The accounting method sees that the final marginal cost of a product will be calculated by summing up the direct costs of labor, the direct costs of materials, the direct expenses and the variable overheads (Brown). The applications of marginal costing revealed that Ford was able to support a price advantage relative to General Motors and Chrysler due to its "intensive use of robotics, which tempered the cost effect on Ford of higher union wage rates" (Weisman, 2007).
The cost/volume/profit analysis is an extremely useful financial tool that will allow managers to make the best informed decisions. The analysis shows how profits will change when modifications occur in the volume of units sold or in the costs incurred in the manufacturing of the respective items. The most common application of the CVP is the breakeven analysis. Throughout the past few years, Ford has not been able to sell the required units of vehicles in order to break even. Foremost, due to an emphasis on fuel-efficient cars in the detriment of trucks, an unstable oil industry across the globe, the increasing prices of metals and other commodities, as well as the deteriorating economy, the Ford officials stated that 2009 is unlikely to brink positive profits. The company will however strive to reach its break even point in order to ensure a relative stability within the industry and market. In achieving this desiderate, they will increase volume production of their small and compact vehicles, such as the Ford Focus or the Ford Fiesta and will decrease the production of trucks and sports utility vehicles. "Unless there is a fairly rapid turnaround in U.S. business conditions, which we are not anticipating, it now looks like it will take longer than expected to achieve our North American Automotive profitability goal. Overall, we expect to be about break-even companywide in 2009 - with continued strong results in Europe and South America" (Alan Mulally, CEO of Ford, quoted in an article by Michelle Krebs, 2008).
6. Capital Investment Appraisal
Ford Motors Corp. generally desires to invest its resources in projects that will generate a satisfactory return on investment and will increase shareholder value. However, since its resources are limited, the financial team has to make use of several techniques of assessing the available opportunities and their expected outcome. Such a technique is called investment capital appraisal, more commonly known as capital budgeting (Investopedia, 2009).
Additional information on the actual applications of capital budgeting by the financial managers at Ford are difficult to retrieve as the information on their specific investments are undisclosed to the public. However, it is highly probable that Ford will not engage in purchasing a new plant or a new manufacturing technology without first knowing how this would benefit the organizations. Questions to be answered refer to the costs of the investments, the number of new automobiles the new plant (or technology) would be able to produce or the cash flows the project would generate. In answering the questions, the financial specialists at Ford would calculate at least the net present value (NPV), the payback period (PP) and the return on investment - ROI (Sukmanowsky, 2008).
The NPV represents the difference between the present value of the cash inflows and the present value of the cash outflows. It also deals with the present and future value of money, using inflation and other adjustments. The payback period is measured by dividing the cost of the project by the annual cash inflows and it strives to identify the time it will take for the investment made to become profitable. Finally, the return on investment takes into account the costs and gains of the investment and assesses its future profitability (Investopedia, 2009).
7. Financing the Business
The Ford Motors Corp. mainly retrieves its financial resources for its own operations. Otherwise put, they keep reinvesting the profits at the end of the year to sustain new endeavors, which in turn generate profits. Part of these profits will be used to pay the dividends to the shareholders, the employee wages or the commodities, whilst another part will be allocated for future endeavors, such as the purchase of a new technology or the opening of a new plant. Most of Ford's revenues come from the sale of their automobiles throughout the world; the leader of the category is North America, with a 2007 average of 2,836,000 sold automobiles, followed by Europe with the sale of 1,918,000 vehicles and South America, with the sale of 436,000 cars (Ford 2007 Annual Report).
More recently however, the company has diversified its product and service offering, coming to retrieve financial benefits from its offering of purchasing services. Otherwise put, Ford begun to enlarge its chances of income (and as such sources of additional investments) by offering their customers financial services in purchasing the desired automobile. In 2007 for instance, the financial services retrieved revenues of $18.1 billion, a 7.7% increase...
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