General Motors Financial Project
Tammy Straus, CPA
Keller Graduate School of Management.
The objective of the project is to collect and analyze financial information of the main divisions of General Motors Company in order to provide accurate and useful information to the management in their effort to assess a long-run financial viability of the divisions and serve as basis to arrive at a conclusion whether a division should be dropped or retained.
Our group related the General Motors Company decision based on the outcome of our research like the one in problem # 13-20 Pg 614 which ...view middle of the document...
Our group uses the data sets from GM financial statements for the last 2 years to help us in identifying, analyzing, and arriving at a conclusion and recommendations for the GM management as part of the restructuration program.
As you may recall, every business decision involves a choice between at least two alternatives.
In this project, our group looks at the costs and benefits that do not differ between alternatives.
If a cost does not differ between alternatives, it is not relevant in the decision making process and it can be ignored. The group also realizes that there are costs that relevant in one situation may not be relevant in another because there are no exact rules for identifying what costs are relevant and which ones are irrelevant.
The group disregard irrelevant costs and benefits in our decision making process because we do not have all the data about the production costs of Cadillac, Chevrolet, Buick, and Hummer.
Retaining or dropping one or several segments of the production lines is a one of the decision making situation where a decision analysis often leads to mistakes.
The group compared the contribution margin of the segment to the fixed costs that could be avoided by dropping one production line to help us make a sound decision and recommendations.
If for example, the contribution margin lost by dropping a segment is greater than the fixed costs that can be avoided, then the segment should be retained.
In the contrary, if the contribution margin lost by dropping a segment is less than the fixed costs that can be avoided, then the segment should be dropped.
The decision by GM to discontinue or keep a production line is often clouded by allocation of common fixed costs. In some cases, opportunity costs may play a key factor in any business decision.
If GM decides to drop some of its production lines as part of the restructuration program, we believe that the sales, variable expenses, contribution margin, insurance, and advertising related to these production lines or segments are all equal to zero, but other fixed costs such as salaries, wages, depreciations will remain the same.
As a result of these modifications in fixed costs, there should be a difference increase or decrease of net income. We do not have all the data to help compute all the changes in net income.
Our group also realizes that the book value of the fixtures should be written immediately after dropping a production line. If the production lines are retained, the remaining book value would be written off over a period time in the form of depreciation charges.
In either case, the entire remaining book value will eventually flow through the income statement as charges in one form or another.
GM (Simplified) Income Statement Dec. 31, 2009
( Dollars in millions)
Net sales and revenue……………………………………….. 57,474
Costs and Expenses:
Costs of sales………………………………………………….. 56,381