47. (Cost management and product life cycle) Ford Motor Co. reported a 58 percent drop in its fourth-quarter profits as a result of the heavy costs of launching new vehicles. And officials predicted that similar costs will continue to depress earnings through the first half of this year.

Ford launched its Taurus sedan, its biggest-selling car, in the fourth quarter, while preparing for the debut of its F-series pickup trucks. The two vehicle lines account for sales of more than one million vehicles each year.

In the first half of 1996, Ford also plans to introduce a new version of its Escort small car, another of Ford’s top sellers.

“The time to make changes is when you are strong,” said David McCammon, Ford’s vice president of finance. He said the automaker still managed to finish 1995 with $12.4 billion in cash despite a drop in full-year reported profit of 22%.

SOURCE: Adapted from Oscar Suris, “Ford’s Net Declined 58 Percent in Fourth Period,” The Wall Street Journal

(February 1, 1996) pp. A3–A4.

a. Why would Ford’s reported profits for 1995 have dropped because of the launching of new vehicles?

b. How would Ford’s reported profit have differed if the company had used life-cycle costing techniques to account for the costs of launching new products?

c. Explain what McCammon meant when he said, “The time to make changes is when you are strong.”

d. By management’s willingness to proceed with launching new products even though doing so lowers reported profits for the current year, what can be inferred about the motivational elements in Ford’s cost management system?