Question

The Ford Motor Company operates two segments (Ford refers to its segments as “sectors”). Using the company’s website, locate sector information for 2015 in the company’s 2015 annual report. (Hint: Look under Investor Relations.) Most of the information will be in the Financial Statements and related Notes to the Consolidated Financial Statements (found in the Form 10-K).

Requirements

What are Ford’s reported sectors in its Balance Sheet and Income Statement? Gather data about each segment’s net sales, operating income, and identifiable assets.

Calculate the ROI for each segment.

Which segment has the highest ROI? Explain why.

If you were on the top management team and could allocate extra funds to only one division, which division would you choose? Why?

Answer 1

Req. 1

The two product segments (sectors) are: 1) Automotive and 2) Financial Services.

(Millions of Dollars)	Operating Profit	Net Sales	Identifiable Assets
Automotive	$8,224	$140,566	$91,959
Financial Services	2,028	8,992	137,026

Req. 2

ROI calculation:

(Millions of Dollars)	Operating Profit	Identifiable Assets	ROI
Automotive	$8,224	$91,959	8.94%
Financial Services	2,028	137,026	1.48%

Req. 3

The Automotive Division has a much higher ROI than the Financial Services Division. The expanded ROI formula may offer some clues as to why this is the case. Sales margin and capital turnover are calculated below:

Sales Margin calculation:

(Millions of Dollars)	Operating Profit	Net Sales	Sales Margin
Automotive	$8,224	$140,566	5.85%
Financial Services	2,028	8,992	22.55%

Capital Turnover calculation:

(Millions of Dollars)	Net Sales	Identifiable Assets	Capital Turnover
Automotive	$140,566	$91,959	1.53
Financial Services	8,992	137,026	.07

The primary reason Automotive has a higher ROI is that it has a much higher capital turnover. The Automotive Division has been able to generate $1.53 of sales on each dollar of its assets, whereas the Financial Services Division has only been able to generate $.07 of sales on each dollar of its assets.

Req. 4

The management team would most likely choose to allocate additional funds to the Automotive Division. The Automotive Division is earning about $0.09 on every dollar invested whereas the Financial ServicesDivision is only earning about $0.01 on every dollar invested.