Ford Motor Company Objective of This Report Essay

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Ford Motor Company

Objective of this report is to use Ford Motor Company 2012 Second Quarter to carry out research on the company's production inventory levels, price and sales data and operational cost information.

Ford Motor Company (Ford) is one of the largest global automotive companies. The company manufactures and distributes automobile across six continents, and the company operates financing business through Ford Motor Credit Company. At the end of the 2011 fiscal year (FY2011), the company recorded total revenue of $136 billion, an increase of 5.7% over FY2010. Ford Motor also recorded the total net profit of $20 billion at the end of the 2011 fiscal years recording the increase of 4.3% over FY2010. The strength of Ford Motor lies with its strong brand that the company sells at premium price. Among its brands are Lincoln, and Ford which are among the strongest brand in the world. (Datamonitor, 2011).

Overview of Ford Motor 2012 Second Quarter

The 2012 Second Quarter is the recent quarter that Ford Motor has recently published. At the end of the 2012 Second Quarter, the company recorded the total sales of $31.4 billion revealing a decline of $2.2 billion from 2011-second quarter. The decline of 2012-second quarter net income was affected by higher tax expense. Moreover, the company total supply at the end of 2012-second quarter was 1,450,000 while the company was able to record the total quantity of 1,447,000 demand for its vehicles making the company to have excess of 3,000 vehicles in its inventory. The paper provides demand and supply analysis of Ford Motor Company to provide the greater understanding on the total number of vehicles that the company supplies during 2012 second quarter and the total sales that the company was able to record during the 2012 second quarter.

1. Analysis of Demand and Supply of Ford Motor Company

Concept of demand is the ability and willingness of consumer to purchase economic good and services at a given price. On the other hand, the supply concept refers to the quantity of products that sellers are willing to offer for sale at a given price. Meanwhile, the concept of supply and demand reveals the interaction of quantity of automobiles that Ford offered for sale and the quantity of motor vehicles consumer demanded. Within 2012 Second Quarter, Ford Motor Company produced the total number of 1.45 million vehicles for all segments. Out of the 1.45 million vehicles that the company supplied to the market, the consumers demanded for the total number of 1.447 Million vehicles making the company have excess of 3,000 unsold vehicles in its inventory. (Ford, 2012). However, the company has been able to realize $31.4 billion from the total sales. Table 1 reveals the interaction of demand and supply, sales and pricing for the 2012 Second Quarter in all the segments that the company is operating. While the company has been able to realize the total sales of $31.4 billion, the interaction of demand varies across segments.

Table 1: Supply & Demand, Pricing and Sales of Automobile Ford at 2012 2nd

Quarter

Segments

Supply (Production Volume) 2nd Quarter 2012

Demand

2nd Quarter 2012

Sales (Billion)

Price

North America

737,000

719,000

$19.7

Europe

369,000

359,000

$7.1

South America

100,000

119,000

$2.3

Africa, Asia-Pacific

244,000

250,000

$2.3

Total

1,450,000

1,447,000

$31.4

$21,700

Source: Ford (2012).

At North American segment, Ford Company was able to realize the highest sales making the company to realize the total sales of $19.7 billion. The company supplied the total number of 737,000 vehicles; however 719,000 vehicles were demanded making the company to have excess 18,000 vehicles in its inventory at North American segment. Similarly, in Europe, the company was able to realize the sales of $7.1 billion. The company supplied 369,000 vehicles to the market and 359,000 vehicles were demanded and 10,000 vehicles remained in the company inventory. It was in the emerging market of South America, Asia, and Africa that the company was able to realize the demand for the excess inventory of North America and Europe. In the South American market, the company realized $2.3 billion sales by supplying 100,000 vehicles; however, 119,000 vehicles were demanded. Similarly, Ford supplied the total quantity of 244,000 vehicles at Africa, and Asia-Pacific markets, and the total number of 250,000 vehicles were demanded. In all the segments that the company was operating, Ford was able to realize the total sales of $31.4 billion with the average price of $27,700. To realize the average price, the paper divides the total sales by the total quantity demanded:

Average Price: Total Sales/Total Quantity Demanded

Price =$31,400,000,000/1,447,000

Price =$21,700

With the interaction of demand and supply in all segments, Ford Company has been able to supply the total number of 1,450,000 vehicles and the total number of 1,447,000 vehicles was demanded making the company to realize the sales of $31.4 billion with the average price of $27,700 for each vehicle.

2. Equilibrium Price and Quantity

The equilibrium price and quantity is where demand and supply intersect. This is the point where the quantity demanded is equal to the quantity of product that a firm supplies to the market. However, during the 2012 Second Quarter, Ford was not able to realize the equilibrium for the total quantity of automobiles supplied to the market because out of the 1,450,000 vehicles supplied to the market, the company was able to sell the total number of 1,447,000 vehicles making the company to record 3,000 excess vehicles in its inventory. With the 2012 Second Quarter, the equilibrium quantity ought to be 1,447,000 vehicles while the equilibrium price should be $27,700 as being revealed in Table 2.

Table 2: Equilibrium Price and Quantity

Equilibrium Price

Quantity Supplied

Quantity Demanded

$23,700

1,407,000

1,417,000

$22,700

1,427,000

1,437,000

$21,700

1,447,000

1,447,000

$20,700

1,427,000

1,417,000

$18,700

1,437,000

1,427,000

Based on the data presented in Table 2, Ford Company will be able to reach the equilibrium price and quantity at $21,700 and 1,447,000 respectively. If Ford supplies vehicles below the equilibrium quantity, there would be a shortage in market and there would be increase in the price because the quantity demanded will be higher than the quantity of vehicles supplied to the market. However, if Ford supplies the total quantity of vehicles above the equilibrium quantity, there would be a surplus in the market leading to a fall in price because the quantity of vehicles supplied will be higher than the quantity of vehicles demanded. (See Fig 1 for the equilibrium price and quantity).

Fig 1: Equilibrium Price and Quantity

Based on the information supplied for the equilibrium price and quantity, Ford's management should use the concept of equilibrium price and quantity to make a strategic decision. Ford's management should study the market before making decision on the total number of vehicles to supply in order to realize the equilibrium price and quantity. The company could drive up the price by creating the artificial scarcity in the market and supply the vehicles below the equilibrium quantity.

3. Elasticity of Demand of Ford Company

The price elasticity of demand measures the response of changes in the quantity to the change in price of vehicles. Typically, price elasticity of demanded calculates the percentages change in the quantity demanded divided by the percentage change in price. The data in the Table 3 is used to calculate the elasticity of demand for Ford Motor Company.

Table 3: Ford Elasticity of Demand

Price

Quantity Demanded

$21,700

1,447,000

$20,700

1,557,000

$19,700

1,657,000

$18,700

1,757,000

$17,700

1,827,000

Formula:

Elasticity of demand= Quantity/Price

Quantity = (1,557,000-1,447,000) / 1,447,000 = 0.076

Price= ($20,700-$21,700)/$21,700 = -0.046

Elasticity of demand= 0.076/0.046= -1.65

The data in Table 3 shows that elasticity of demand is elastic because elasticity of demand is 1.65 since Economists generally ignores minus sign when calculating the elasticity of demand to avoid an ambiguity. (Mcgraw-hill, 2010). Ford Company could make the strategic decision using the concept price elasticity of demand by determining the percentage change in demand with change in price. Based on the data presented, Ford could realize the elastic demand for its vehicles by declining the price and increase the quantity of vehicles supplied to the market and the company will record more sales by declining the price.

4. Toyota is a major competitor of Ford Motor Company in the United States and outside the United States. Similar to Ford Motor Company, Toyota is a strong brand that commands global market demand. If Toyota declines the price of its vehicles by realizing elastic demand for its vehicles in the United States and the international market, there would be a decline for the demand for Ford's vehicles making Ford to record a decline in sales. The overall effect will make Ford to record a decline in the total revenue and consequently decline in the net income.

5. Cost Analysis and Graph

Ford's totals costs for the production of goods and services consist of variable costs and the fixed costs. The variable costs are the costs that vary with the change in…[continue]

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