Minicase 1 McDonnell Douglas}
McDonnell Douglas, based in St. Louis, Missouri, describes itself in its 1994 annual report as the world's largest builder of fighter and military transport aircraft, the third largest commercial aircraft maker, and a leading producer of helicopters, missiles, and satellite launch vehicles.
The company's strategy for future growth might be described as "cautiously aggressive" because it aggressively competes in markets in which it believes that it has a competitive advantage, while it evaluates other markets carefully and then expands its product line or divests, depending upon whether it believes that it can remain or become a leading competitor.
McDonnell Douglas's 1994 income statement is reproduced here.

\section*{Instructions}

(a) What account name appears to represent McDonnell Douglas's cost of goods sold account? Why do you think that company chose the account name that it did? Using that account as cost of goods sold, what is gross profit?

(b) The income statement shown is in summary form. This means that each account title listed is a summary of several other accounts. For example, the Revenue account includes such things as Commercial Aircraft Revenue, Defense Contract Revenue, and so forth, as well as any offsetting accounts such as Sales Discounts. In which summary account from the income statement would these merchandising accounts be located:
(1) Sales returns and allowances (2) Merchandise inventory increases and decreases (3) Sales discounts

(c) The company is evaluating a divisional plant that builds satellite launch vehicles. The product line presently consists of a single vehicle, which is the only one of its kind, but competitors have built vehicles that can launch smaller satellites. The company is confident that it can produce an expanded product line, which would include both larger and smaller vehicles than the one currently made. The two choices being evaluated are: First, spend approximately \(\$ 17\) million in research and development to expand the product line. This cost would be considered an expense immediately. Revenue of about \(\$ 100\) million would be generated each year, beginning 2 years after development; it would continue at least 5 years but possibly longer. Second, sell the assets of the existing business to a competitor. This would generate a gain of \(\$ 315\) million next year. If the choice is made at the end of this year, how will net income be affected under each alternative? How will gross profit change? Which alternative do you recommend? Give reasons for your answer.

Transcribed Image Text:

MCDONNELL DOUGLAS Revenues MCDONNELL DOUGLAS Income Statement For the Year Ended December 31, 1994 (in millions) Costs and expenses Cost of products, services, and rentals General and administrative expenses Research and development Interest expense Total costs and expenses Earnings before income taxes Income taxes Net earnings $13,176 11,026 684 297 249 12,256 920 322 598