Relating CVP to Management Decisions on Production of SUVs at Ford Motors Abstract Ford Motors Corporation is one of the best performing car manufacturers in the world, and is the second biggest in the American car market, beating the global favorite, Toyota Motors. To keep the competitive edge in the ever-changing car manufacturing market, Ford has made several decisions to adapt its production modes to market demands and consumer preferences in the recent past. By manipulation of volumes of car produced, mainly in response to shifting customer preferences, the car manufacturer wishes to retain profitability as it steadily consolidates its position in the car manufacturing industry.
CVP analysis is a simplistic yet comprehensive technique that can explain whether the production volumes are viable in terms of profitability or not. The production of SUVs by the Ford Motors has experienced wild variations because of the unavoidable impact of market dynamisms (Martinez, 2010). This report seeks to relate Ford management’s decisions concerning production of SUV cars to Cost Volume Profit analysis. Table of Contents Abstract 1 Table of Contents 2 Introduction 3 Analysis of Ford Management’s Decisions on SUV Production Using CVP 5 How Management’s Decisions Improved Production 6 Conclusion 7 References 8 Introduction Cost-volume-profit (CVP) is a management technique with broad applications in decision-making.
Notably, the resemblance of the technique to break-even analysis is uncanny. For instance, one of the roles of CVP is to establish the point at which total revenues and total costs, consisting of both the variable and fixed costs, are equivalent to each other. Furthermore, the same overlying assumptions of break-even analysis apply to cost-volume-profit analysis: classification of costs as fixed or variable, zero inventories, linear trend of cost and revenue behavior, and activity as the only factor affecting costs (MAAW, 2012).
With the reasonable presumption that only the number of units manufactured changes, all other factors, and most importantly profitability, depend entirely on the production volumes. Ford’s Case At Ford Motors, the SUV brand of vehicles started to experience a substantial sales downturn in the American market. A number of factors are attributable to the phenomenon, which resulted in billions of dollars’ worth of losses in as early as 2007 (Ford, 2008). Ford lowered production of SUVs, and the company’s profitability inevitably suffered a blow.
The major reason behind the reduction in profitability was the double-digit percentage cuts in production volumes, which put a strain in the company’s ability to retain profitability. According to Mark Fields, the president of Ford Motors in the Americas, the rise in fuel prices have dented consumers preference for fuel guzzling SUV vehicles, which caused a reduction in the company’s sales (Martinez, 2010). Figure 1: Ford Income Statement A Simple Income Statement for Ford Motors from 2007 to 2011 2011 2010 2009 2008 2007 Total Revenue 136,300 128,954 116,283 143,584 168,884 Total Expenses 127,619 121,805 113,684 158,479 173,170 Pre-Tax profits 8,681 7,149 2,599 -14,895 -4,286 Figure 2: Ford Production Volumes Car Production Statistics at Ford Motors from 2007 to 2011 2011 2010 2009 2008 2007 Total Production 6,038,949 4,988,031 4,685,394 5,407,000 6,247,506 Car Production 3,461,453 2,958,507 2,952,026 3,346,561 3,565,626 % Change Total 21.06879 6.459158 -13.3458 -13.4535 -3.98566 % Change Cars 16.99999 0.219544 -11.7893 -6.1438 -9.88402 Ford’s Decision Ford’s profitability was solely dependent on sales turnover.
Ford’s management has made the following decisions to improve declining sales volume: A. Increasing production capacity for its value chain B. Reducing production of large trucks and SUVs C. Production of more of energy efficient vehicles and lowering production of the cars that have poor fuel efficiency D. To lower its production for the poorly selling vehicles by 15% as of 2007 (Ford, 2008) E. Engineering an improved pace of development and innovation of new commodities F.
Comprehensive restructuring to keep the company profitable (Ford, 2011) G. Leveraging on the company’s global asset base H. Through a bizarre twist, the management has of late announced a decision to increase its production of the SUV brand of cars (Martinez, 2010) following a global fall in supply after a period of decreasing production of SUV by car manufacturers Analysis of Ford Management’s Decisions on SUV Production Using CVP CVP has many presumptions, one of which is that unit costs remain constant, and only the number of units change. Admittedly, CVP is not entirely accurate.
However, for slight deviations in the standardized parameters, the method remains considerably accurate in helping the company management make reliable decisions on the company’s profitability in relation to its production capacity. For a firm to break-even, it has to sell a minimum number of units. Consequently, as production goes down, the company’s profitability declines, and on some level, the company begins to report losses, at which point the only way to minimize losses is to terminate production altogether. Regrettably, the SUV car model is taking this path of declining sales.
In reaction to the diminishing SUV car market, the car manufacturer has resulted in cutting production volumes (Martinez, 2010). Fall in revenue amounts is a direct result of such a move. Worse market conditions have further put the company’s profitability for the line of cars in jeopardy. The management is slowly but surely reducing the production of SUVs to keep the company afloat with modern car models. Ford Motors does continuous review of the market trends on a quarterly basis. On another note, Ford Motors has adopted a more adaptive management approach: Six Sigma, whose mandate is to guide the company in maintaining profitability by a careful and intricate balance of production, workforce management, effective management, and product innovation (Scheid, 2011).
Generally, the automaker is focusing on producing vehicles that offer better fuel efficiency and cutting the production of SUVs and other fuel guzzling vehicles, a goal consistent with the company’s executive chair that environmental awareness is the single most important issue plaguing businesses in the twenty first century (Bullard, 2009). How Management’s Decisions Improved Production Given the trends in the car market, Ford’s best most hope for sustained profitability lies solely on production dynamisms.
Just like in the CVP analysis, production volume is the most important factor affecting profitability of an organization. The company is already making all the right moves in quarterly evaluation of its demand for its SUVs. The market reviews have led to a decision by the management to lower production of SUVs to avoid overproduction and high inventories, which could unnecessarily tie up the company’s assets. The company notes that constant slashes in SUV production volumes will eventually make it harder for the company to break-even (Martinez, 2010).
In CVP terms, the company’s total costs will exceed total revenue, which means the firm may fail to recoup its cost of production from its sales. The Ford has embraced the need to realign its manufacturing strategy, a management decision that has driven aggressive innovation and research in fuel technology. Ford is now once again in a formidable position in the car market. Because of new fuel technologies, ranging from electrification of new cars to hybrid electric transmission, have helped boost sales (Ford, 2011).
Current production aims at offering futuristic car models with limitless abilities to meet consumer expectations given their high customizability. The production department in charge at Ford Motors has also taken in its stride industry’s best practices with its more open management style, where the manufacturing technology is helping to boost sales and by extension the company’s profitability. As proven by the CVP decision paradigm, production is the heart of profitability, as production volumes single-handedly determine whether a firm enjoys successive increases in profitability or wallows in a string of losses.
The decision to improve the manufacturing and production technology of the SUV car brand will effectively address this important agenda, and get the firm to profit from it once more. Market adaptability is an overriding factor in successful attainment of profitability goals. Ford’s management decision to increase by up to 45% the production of SUVs to meet current global demands demonstrates management flexibility and adaptability to volatile economic conditions (Martinez, 2010). The move will increase profitability of the SUV brand, a claim that provable by the use of CVP analysis technique.
Increased production given constant fixed, variable costs, and price per unit raise a products profit margin. Ford Motors will therefore, report higher profit margins from the extra production units. Conclusion CVP analysis technique helps give financial analysts insight into the underworking of a corporate entity, by establishing whether the company is effective or not. The overriding premise of CVP is the units of a product produced. The management in charge of Ford Motors has made several decisions regarding its production line for the SUV car model over the last couple of years.
At one time, the decision seemed to contradict previous decisions made by the company when it decided to increase its production of SUVs after almost three years of diminishing production of the same (Martinez, 2010). The management decisions have been highly effective, and the company has remained highly profitable and even managed to outdo major car manufacturers in production volumes. Through CVP analysis, Ford has remained safely beyond the break-even point, and is making impressive profits because of its good production volumes and market strategies and sound management decisions.
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