Question

In: Accounting

I just want to know if this is decent or should I make some changes. 1....

I just want to know if this is decent or should I make some changes.

1. What are some examples of Ford's variable costs (please discuss and explain 3)?

Ford is focused on units produced so their variable costs will include variable factory overhead, direct materials and direct labor. One direct labor cost is that of manufacturing and assembly which deals with the actual assembled components. These components are another form of direct costs; those of direct materials such as gas tanks, circuit boards, glass and motor vehicle frames. All of these can be traced back to the production of a finished product “their vehicles.” All these materials can vary in cost as well as direct labor due to the increase or decrease in production. These materials can be considered goods manufactured since they are incomplete until the vehicle itself is complete. At the point of completion they are considered finished goods to which all direct materials and direct labor can be traced back to.

2. What are some examples of Ford's fixed costs (please discuss and explain 3)?

Ford’s fixed costs can include rent for factory or office space, insurance on facilities, utilities, depreciation expenses on machinery, loans and taxes. These fixed costs will be incurred even if there is no product to be made for a given time. They are to be acquired no matter the increase or decrease of the production of a given company. If there is an increase in the production of units, fixed costs will not vary but will decrease per unit as units produced increase. This is due to the fixed costs being spread over more units as they increase.

3. Is Ford a highly levered company? (Careful, the book discusses operating leverage. Your answer should be in the context of the definition of operating leverage discussed in your book). Why or why not? Also, how does this effect the break-even point? Explain.

Ford is a known high levered company; this is due to its high fixed costs and not being a labor-intensive business. Ford demonstrates its ability to have a higher percent increase in income due to its high fixed costs, so small changes in their units sold can significantly increase their overall profitability. Thus proving that having a high fixed costs system is what helps drive ford as a high levered company. Break-even points will increase as fixed costs increase, such as taxes when they increase it raises the break-even point to be met. This can also be said for Ford’s fixed costs like rent, if decreased then their break-even will drop as well since less revenue is now needed to meet the break-even.

4. If raw material costs such as steel (and all else equal meaning holding all other variables constant) were to increase how would this effect the following? Please explain.

  • Break-event point
  • Contribution Margin
  • Income from Continuing Operations

As raw material costs increase the break-even will increase. The increase in steel has created a need for more revenue to help with higher variable costs. Since all other variables remain constant, this means that the contribution margin will have decreased due to raise in price of steel, reducing the excess of sales over variable costs. Meaning less income for fixed costs provided by operations. As contribution margins decrease the income from continuing operations will also decrease since more funds will be needed to cover the variable costs to run the company. If the company continues to increase operations, then the Fixed incomes should begin to decrease since fixed costs will now be spread over more units.

Solutions

Expert Solution

All the answers are good and decent only, you can rely on these answers.

1. What are some examples of Ford's variable costs (please discuss and explain 3)?

Answer:+

Ford is focused on units produced so their variable costs will include variable factory overhead, direct materials and direct labor. One direct labor cost is that of manufacturing and assembly which deals with the actual assembled components. These components are another form of direct costs; those of direct materials such as gas tanks, circuit boards, glass and motor vehicle frames. All of these can be traced back to the production of a finished product “their vehicles.” All these materials can vary in cost as well as direct labor due to the increase or decrease in production. These materials can be considered goods manufactured since they are incomplete until the vehicle itself is complete. At the point of completion they are considered finished goods to which all direct materials and direct labor can be traced back to.

2. What are some examples of Ford's fixed costs (please discuss and explain 3)?

Answer:+

Ford’s fixed costs can include rent for factory or office space, insurance on facilities, utilities, depreciation expenses on machinery, loans and taxes. These fixed costs will be incurred even if there is no product to be made for a given time. They are to be acquired no matter the increase or decrease of the production of a given company. If there is an increase in the production of units, fixed costs will not vary but will decrease per unit as units produced increase. This is due to the fixed costs being spread over more units as they increase.

3. Is Ford a highly levered company? (Careful, the book discusses operating leverage. Your answer should be in the context of the definition of operating leverage discussed in your book). Why or why not? Also, how does this effect the break-even point? Explain.

Answer:+

Ford is a known high levered company; this is due to its high fixed costs and not being a labor-intensive business. Ford demonstrates its ability to have a higher percent increase in income due to its high fixed costs, so small changes in their units sold can significantly increase their overall profitability. Thus proving that having a high fixed costs system is what helps drive ford as a high levered company. Break-even points will increase as fixed costs increase, such as taxes when they increase it raises the break-even point to be met. This can also be said for Ford’s fixed costs like rent, if decreased then their break-even will drop as well since less revenue is now needed to meet the break-even.

4. If raw material costs such as steel (and all else equal meaning holding all other variables constant) were to increase how would this effect the following? Please explain.

Break-event point

Contribution Margin

Income from Continuing Operations

Answer:+

As raw material costs increase the break-even will increase. The increase in steel has created a need for more revenue to help with higher variable costs. Since all other variables remain constant, this means that the contribution margin will have decreased due to raise in price of steel, reducing the excess of sales over variable costs. Meaning less income for fixed costs provided by operations. As contribution margins decrease the income from continuing operations will also decrease since more funds will be needed to cover the variable costs to run the company. If the company continues to increase operations, then the Fixed incomes should begin to decrease since fixed costs will now be spread over more units.


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