What you will learn to do: Decide which products to produce and sell

Managers often have to make tough decisions about what products to continue to produce (or buy) and sell, especially if capacity is limited in some way such as the number of machines, factory space, shelf space, or availability of parts and supplies, or even availability of labor. In addition to product lines, managers may need to drop departments, segments, or geographic areas

For instance, Harley-Davidson opened factories in India in 2009 producing a wide range of motorcycles, but by July 2020, they were selling only about 100 units per month in that country. In September 2020, as part of the ‘Rewire’ strategy, the company decided to wind up operations in markets, like India, that projected low sales and profitability for the brand.

In addition, along with the introduction of an electric motorcycle (the Livewire) and an adventure bike (the Pan America), after nearly 65 years of continuous production, Harley announced in 2021 that it would discontinue the iconic Sportster.

For a nice analysis of the changes between the 2020 lineup and the 2021 offerings, watch:

You can view the transcript for “The Harley-Davidson 2021 Lineup?” here (opens in new window).

Also in 2020, Ford Motor Company stopped producing all cars except the Mustang and the Fusion, choosing instead to concentrate on trucks and SUVs (including the little Ford Escape). When Ford first broke the news in 2018, the automaker explained that the decision came down to numbers. In an interview for Ford Authority, Kumar Galhotra, President of Ford North America and VP of Ford Motor Company, said, “Our industry is very resource-intensive – we have to create a particular product, and the factory to build it, and all the tooling and our suppliers – that can run into billions of dollars. The question then became, in that environment, of a finite amount of capital, where do we want to invest that capital? Do we want to invest it in a declining segment, or do we want to invest it in a growing segment?”

You can probably imagine the conversations and presentations that must have gone on in the boardrooms of Harley-Davidson and Ford as the managerial accountants presented financial analyses of product lines, like the Harley Sportster, or the Ford Fiesta, or Harley’s factories and dealerships in India that must represent millions of dollars of sunk costs, recommending those segments be eliminated. Some managers will be emotionally invested in a product and won’t want to cut it even though it may be losing the company money. Other managers may look at the large investment already made and will want to hang on longer. The human resource manager may be thinking of the headaches that will come with laying off workers and dealing with the union.

So, how do managerial accountants help companies make these bold decisions? We’ll answer that question in these next readings.

When you are done with this section, you will be able to:

• Identify profit/loss centers by product/segment
• Understand the effects of sales mix on fixed costs
• Understand how constraints affect product mix

Learning Activities

The learning activities for this section include the following:

• Reading: Segments
• Self Check: Segments
• Reading: Fixed Costs
• Self Check: Fixed Costs
• Reading: Constraints
• Self Check: Constraints