Question

You were asked to review the accounting details for a specific manufacturing segment for Ford Motor Company. While Ford has stated numerous times that they are considering shutting down that portion of the business, they are waiting for your assessment of the losses to make that decision. In your review you find that the segment of the business has not seen a profit in the nine years it has been in operation but you know the manufacturing segment functions as an intangible asset contributing to the overall success of the company. If you explain to them that the losses are significant, it could mean you along with everyone else would lose your job. If you tell them that it is “worth” continuing, the leadership could easily question your assessment abilities. What would you do? Explain how your conversation would go, and what information you would present the leadership with to make the ultimate decision.

Answer 1

Ans.

The segment of the Ford Motor Company has not seen a profit in the nine years it has been in operation but the manufacturing segment functions as an intangible asset contributing to the overall success of the company.

The decision whether the company has to continue the segment or not depends on various factors .

As it is reviewed that the segment is in loss from past nine years but we have to review also that despite of these losses whether the company is able to cover its variable cost or not because losses occur when revenue do not cover total costs and also if revenues are more than variable cost then its better to produce in short run rather than shutting don.Also in long run all costs must be covered if the segment  is remain in business.

Also a segment should be discontinued when the discounted present value of its expected future profits decreases below the value it can receive from selling its valuable assets.So first we compute the discounted present value of its expected future profits and the value of recoverable assets. And if the value of assets are more than present value, management should take decision to continue the segment.

Also research should be conducted for the market of segment's product that on what stage of product cycle it is.If it is on its growth stage and others in the same industry will make profit then it will also possible that the segment will make profit, its just that there is a need of some innovation and better marketing strategies for promotion of the product so it will generate revenue in some while.

Also it is to be reviewed that whether the management and employees of different departments are work effectively and efficiently or is there any need of some training etc. so that they will work in accordance with the demand of customers and meet the requirement as per specifications so that revenue will increase.

So after reviewing all this we make a report considering all the above factors and if the conditions are favourable then it is to be suggested that continue the operation for some more years and after considering facts and figures management is also in a better position to take decision.