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In April 2009, Ford announced it would not need government aid and claimed it planned to break even in two years. Ford has stayed ahead of its main rival General Motors by selling Aston Martin, Land Rover and Jaguar in the past two years. GM, meanwhile, went through a massive restructuring after filing for Chapter 11 bankruptcy proceedings. GM is temporarily owned by the US government after investing $57.6 billion in the company.
The company will reach a break-even point by 2011, according to a plan GM executives presented at a congressional hearing. He further announced that he would cut costs by eliminating 47,000 jobs, closing five more unprofitable factories, and reducing at least $18 billion in debt. Sheet. It was expected that these cost reductions would benefit the company even when the US auto market was back to between 11.5 million and 12 million vehicles sold per year.
JD Power and Associates, a global marketing information services firm, announced its projections regarding the new automotive industry break-even point. According to Gary Dilts, senior vice president of US automotive at JD Power & Associates, the break-even point for the domestic automotive industry has decreased by more than 2 million units due to cost-cutting measures such as union and renegotiation of supplier contracts. Will come When comparing current industry conditions to those forecast in 2010. Dilts attributed this decrease to a significant decline in the auto industry, which resulted in a reduction in sales volume of over 7 million units between 2000 and 2009. This sales volume is $175 billion. in net revenue.
Fixed costs make up a major portion of total costs in the automobile industry. Manufacturing plants, assembly lines, and technology invested in to build vehicles are some of the items that make up fixed costs. Compared to fixed costs, variable costs make up a relatively small portion of total costs. This puts the auto industry in a risky position due to high operating leverage.
The definition of operating leverage is the ratio of fixed costs to total costs. The higher a firm’s fixed costs, the higher its operating leverage. In firms with high operating leverage, small percentage changes in sales volume result in large percentage changes in profit. This variability or sensitivity of profits to changes in sales volume puts the firm in a risky position. According to the “higher the risk, higher the return” rule it also means that if the demand and hence the sales volume is high then there will be more profit.
In the automobile industry, since fixed costs are relatively high in times of recession, as demand and sales volume decrease, earnings to cover fixed costs will likely be lower, meaning it will be more difficult for automobile companies to break even. . So automobile companies start cutting costs, especially fixed costs, such as closing unprofitable facilities, eliminating jobs. For example, GM sold its unprofitable Hummer to a Chinese company.
Car companies must increase the amount of profitable vehicles and effective advertising activities to be able to sell them to customers. The increase in sales volume will help cover higher fixed costs and reach the break-even point. On August 6, 2009, Edward Whitacre Jr., the new president of General Motors, said that GM needed to improve the number of vehicles it sold. To do this, he said, the board may decide to advance the launch of several new vehicles.
Comparing Ford and General Motor’s consolidated results of operations from Form 10-Ks both of these companies submitted to the Securities and Exchange Commission (SEC) back in 2008:
Ford (million)
Revenue: 146,277
Cost and Expenses: 160,949
Net Income/Loss: (14,672)
Sales Volume: 5.532
General Motors (million)
Revenue: 148,979
Cost and Expenses: 179,839
Net Income/Loss: (30,860)
Sales Volume: 8.144
The break-even points for these companies can be calculated using the revenue, cost and volume figures above.
ford
Average price: 146,277 / 5.532 = $26,441
GM
Average price: 148,979 / 8.144 = $18,293
To cover its costs and expenses, Ford had to sell: 160,949 / 26,441 = 6.08 million cars and trucks. To cover its costs and expenses, General Motors had to sell: 179,839 / 18,293 = 9.83 million cars and trucks. Additional sales volumes GM and Ford had to make in 2008 to reach the break-even point.
Ford: 6.08 – 5.532 = 0.554 million
GM: 9.83 – 8.144 = 1.686 million
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