Fixed and Variable Costs

Costs of outputs are at the heart of every business success. Fixed and variable costs vary in their cause, change and effect on the profits. The profit margins, sustainability, and growth of Ford Motor Company depend on its fixed and variable costs as compared to its volume of output (Ford Motor Company, 2017). In this paper I am going to analyze the financial statements of Ford Motor Company and discuss the different costs, their differences, their interrelation and effects of each other.

Discussion

Fixed and variable costs differ in their effect on a company's output. They are interrelated and often an increase or decrease in one may determine a change in the other. Fixed costs refer to the expenses that do not change the volume of outputs in a company in the concerned range of time. In Ford Motor Company these include rent, furniture, and equipment. The company leases almost 50% of its distribution centers (Ford Motor Company, 2017). The company is often faced with various litigation costs but not limited to injury and environmental claims. Ford Motor Company also engages in advertising and sales promotion actively. Variable costs denote the expenses that are directly influenced by the volume of a company's output. In Ford Motor Company these include wages, raw materials, freight and duty costs, and warranty costs. The company had about 24,000 employees as of 2016 (Ford Motor Company, 2017). Its raw materials include base metals, precious metals, energy, and plastics.

An increase in variable costs means an increase in production output. Fixed costs per unit reduce with increase in total volume of output. A rise in variable costs per unit, therefore, translates into a reduction in fixed costs per unit. For example, in Ford Motor Company an increase in the total number of vehicles produced means an increase in the cost of raw materials used, which in turn means reduced costs of rent per unit vehicle. Another example would be an increase in freight expenses. Increased production of vehicles translates to an increase in the cost of transportation while on the other hand, it translates to a decrease in cost of advertisement per unit vehicle sold.

Conclusion

                In conclusion, fixed and variable costs of Ford Motor Company are sensitive to its production output and to its profit margins and sustainability. Its fixed costs include rent, furniture, equipment, litigation, advertising and sales promotions among others. Variable Costs include but are not limited to employee wages, cost of raw materials, freight and duty costs and warranty expenses.

                                                                  

References

Ford Motor Company (2017). Ford Motor Company 2014 Annual Report. Retrieved from www.corporate.ford.com