(Cost management and product life cycle) Ford Motor Co. reported a 58% drop in its fourth-quarter profit 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.

In the fourth quarter, Ford launched its Taurus sedan, its biggest-selling car, at the same time it was 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 Mc- Cammon, Ford’s vice-president for finance. He said the auto maker still man¬ aged 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% in 4th Period,” Wall Street Journal (February 1, 1996), pp. A3, A4. Reprinted by permission of The Wall Street Journal, ©

1996 Dow Jones & Company, Inc. All Rights Reserved Worldwide.]

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

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

c. Explain what David 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 svstem?

O J Ethics and Quality Discussion LO1