General Motors Production Levels

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Paper outline

  1. Introduction
  2. Background Information
  • Inventory and sales
  1. Demand and Supply analysis
  2. Equilibrium quantity and prices
  3. Elasticity of Demand
  • Elasticity interpretation
  • Costs analysis
  1. Total revenue and marginal revenue
  2. Capital budget cost-related tools
  3. Expansion Strategies
  • Conclusion
  • References

 


 

General Motors Production Levels

Introduction                                    

General Motors Company remains the leading multinational corporation in the world today. The company records the highest sales units in the world. Since its inception in the year 1908 the company has gained significant global growth and now operate most of the countries directly through subsidiaries or indirectly through joint ventures. To maintain its leadership position, the company through its research and development department innovates and comes-up with new car models. This has enabled the company to become the first company in the world to manufacture hybrid electrical vehicle (General Motors, 2012).

The company announced a profit of $ 4.7 billions after long streams of losses from the year 2004. This is attributed to increased unit sales of 2, 503, and 820 and 2, 547, 203 units in the United States and China. This marked a positive step in the future after the United States intervened through cash bailout to avoid the collapse of General Motors. Additional, the company had an Initial Public Offering (IPO) in the year 2010 that successfully and attracted so many investors across the world. These helped the company return to profitability in the year 2010 to 2011 (Bunkley 2010).

Background Information

General Motors Company is the world largest automotive company. The company manufacturers and sells cars and trucks in more than one-hundred and fifty countries in the world. General Motors is incorporated in the United States of America, and it is headquartered in Detroit. The core General Motors production divisions are Chevrolet, Cadillac, Buick, and GMC. The company manufactures and sale its products through subsidiary companies across the world (General Motors Company, 2012).

General Motors is known by the brand name Opel in the majority of European countries. It works through a subsidiary known as Vauxhall Motors in the United Kingdom. China forms a major production and sell of General Motors cars in the Asian market. In China, General Motors produces the cars under a joint venture with Chinese SAIC Motors. This has seen the rise in the percentage sales of company product units by the year 2010. Furthermore, the company still maintains its dealership position in Japan through GM Chevrolet Shop and also sells its products through Yanase Company Limited (General Motors Company, 2012).

The company has also long history in the African market. Egypt was the first country in which General Motors started its operations in Africa. Presently, General Motors Egypt which was founded by Al-Monsour Automotive Company is the manufacturer of General Motor brands in Egypt. The General Motors East Africa (GMEA) in Nairobi Kenya assembles and markets Isuzu trucks and buses in the East African region. Chevrolet products are also marketed by GMEA. General Motors wholly owns General Motors South Africa (GMSA) in South Africa. GMSA assembles and sales the General Motors products in South Africa. Nigeria and Tunisia are also part of countries in which General Motors operates (General Motors Company, 2012).

Inventory and sales

General Motors manufacturers a wide range of cars. The major brands produced by the company include Buick, GMC and Cadillac. The company also produces trucks and other lighter vehicles. The inventory levels of May, June and July Chevrolet are as shown below.

 

 

 

 

Table 1: GM vehicle May 2012 vehicle inventory

Inventory Units @

May 31, 2012

Days Supply

(selling days

Adjusted

Units @

April 30, 2012

Days Supply

(selling days

Adjusted

All Vehicles 694,600 74 701,389 79
Cars and

Crossovers

223,296 116 226,585 121

 

Table 2: GM vehicle June 2012 vehicle inventory

Inventory Units @

June 30, 2012

Days Supply

(selling days

Adjusted)

Units @

May 31, 2012

Days Supply

(selling days

adjusted

All Vehicles 700,927 76 694,296 74
Full-size

Pickups

238,194 135 223,296 116

 

 

 Table 3: GM vehicle July 2012 vehicle inventory

Inventory Units @

July 31, 2012

Days Supply

(selling days

adjusted)

Units @

June 30, 2012

Days Supply

(selling days

adjusted)

All Vehicles 663,439 79 700,927 76
Cars and

Crossovers

324,504 62 361,416 58
Full-size

Pickups

238,165 136 238,194 135

 

In the first quarter of the 2012-2013 financial year that ended in May 2012, General Motors set a quarterly sales record in China. During the same period, the company also had significant sales increase of twenty-nine percent in Russia. The global Chevrolet sales also hit a record of 1.2 million units (General Motors Company, 2012).

General Motors reported an eleven percent increase in total sales in the United States of America. This corresponds to sales volume of 245,256 units. Chevrolet recorded a ten percent increase in sales. Buick and GMC both recorded a nineteen percent increase. The total sales increased in June to stand at 248,750 vehicles. This is attributed to double increase in the sales of Buick, Chevrolet, GMC and Cadillac. However, there was a deep in July sales whereby the company managed only 201,237 vehicles. These results are summarized below (General Motors Company, 2012).

 

2012

Highlights

May 2012 sales June 2012 sales July 2012 sales
Chevrolet 177,943 180,098 138,942
GMC 38,877 37,677 34,487
Buick 18,565 18,851 14,391
Cadillac 9,871 12,124 13,417
Total GM 245,256 248,750 201,237

For the purpose of analysis, Chevrolet brand is selected. Furthermore, due to the fact that Chevrolet brand models retail at different prices only one model is used in the analysis. The prices are the prevailing market prices in the United States of America.

Demand and Supply analysis              

Supply and Demand are fundamental economics concepts. By definition demand is the quantity of a product or service that consumers are willing to buy at a particular price (Boyes &Melvin 2012). Conversely, supply refers to the amount of products or services that producers or suppliers are willing to offer to the market at a particular price. Understanding demand and supply is essential for any company in the optimal allocation of resources. These concepts help the management to ascertain ideal levels of demand and supply that are essential in the achieving sustainable company revenues (Boyes &Melvin 2012).

In the period running from May to July 2012, Chevrolet brand sold 496,533 models. The volume of sales increased from 177,943 in May to 180,098 in June. However, the sales volume of July dropped to 138,945 vehicles. On the other hand, the prices of Chevrolet Cruze varied from $ 19, 816 per vehicle in May to $ 21,151 per vehicle in July. The price the same car model stood at $ 17,443 in June (General Motors Company, 2012).

Equilibrium quantity and prices

Equilibrium point is a point whereby the quantity demanded of a product equal the quantity supplied in the market at a particular price. This point reveals that a company is efficiently allocating its resources in the production of its products. Equilibrium conditions depict that every market participant that is customer and supplier is satisfied with the prevailing market or economic conditions (Arnold, 2011). The equilibrium price and quantity of General Motors Chevrolet Cruze model is as analyzed in the graph below:

Demand curve

The equilibrium price from the graph above is approximately $ 18,500 vehicles. At this price the company is expected to supply approximately 179,000 Chevrolet Cruz vehicles. From these equilibrium prices and quantity the company can now efficient allocate resources in the production of the vehicle.

Elasticity of Demand

Price elasticity of demand refers to the responsiveness of quantity demanded of a product or service to changes in prices of the quantities offered. It gives the percentage change in the quantity demanded due to price change (Boyes &Melvin 2012). Price elasticity of demand can either be inelastic or elastic. Inelastic demand is a situation whereby change in price will result in a minimal change in the quantity demanded. On the other hand, elastic demand is a situation where a small change in quantity price result in a large effect on the quantity demanded of that particular product or service. In simple terms elasticity of demand are the changes on the demand curve due to changes in prices of a product or service (Boyes &Melvin 2012).

Majority of products that have elastic demand are durable goods. Automotive product belongs to this category and hence we expect it to have elastic demand. Price Elasticity of Demand can be calculated by the formula below:

Whereby Ed=Price Elasticity of demand (PED)

P1=Price one

P2=Price two

Q1 =Quantity one

Q2= Quantity two

General Motors price elasticity of demand for the recent quarter sales can be calculated as follows:

= 17,443 + 21,151   X -3708

138,945 + 180,098   -41153

 

=38594 X 3708

319043 X 41153

 

= 0.121 X 0.09

= 0.01

The results from the calculation reveal the opposite of the assumption that durable goods have elastic demand. The results show a change in price of Chevrolet Cruze results in a small change in the quantity demanded. This means there could other factors affecting the demand rather than just prices.

Elasticity interpretation

The closest rival of General Motors Company in North America segment is Ford Company. Assuming that Ford Company had price elasticity of demand of 0.01, it could present tough market conditions for General Motors. This means that Ford Company can steadily increase its prices without significantly affecting its sales volumes in the market. Increase in price is likely to increase the revenues of Ford vehicles as compared to General Motors. Conversely, if General Motor will attempt to increase the price to as Ford it will have a negative effect on its revenues at the end.

Costs analysis

The total variable costs of production per Chevrolet vehicle was approximately $ 6 000 in the first quarter of 2012 financial year. This was a reduction from $ 8 165 in the preceding year. The fixed cost of producing the same model of Chevrolet vehicle is approximately $ 10 000 below (General Motors Company, 2012). To get the total production cost we add the variable cost to the fixed cost.

                        Variable Cost   Total variable   Total Fixed   Total Costs       Unit Cost        

Units Produced       per Unit             Cost 3               Cost                 5                     6

             1                     2                       (1×2)                 4                 (3+4)               (5 ÷1)                    

100                     $60               $ 6,000           $10,000           $16,000              $160.00

200                     $60               $12,000           $10,000           $22,000               $110.00

500                     $60               $30,000           $10,000           $40,000               $ 80.00

800                     $60               $48,000           $10,000           $58,000               $ 72.50

1,000                     $60               $60,000           $10,000           $70,000,             $ 70.00

Marginal cost is defined as a change in the total cost due to a unit change in quantity produced of a product (Boyes &Melvin 2012). In other words, marginal cost is the cost of producing an additional unit of a product. It Marginal cost can be calculated as follows:

Marginal cost =change in total variable cost ÷ change in quantity of output

MC   =Change in TVC ÷Q

First change = 6000 ÷ 100 = 60

Second change = 18000 ÷ 300 = 60

Third change     = 18000 ÷ 300 = 60

Fourth change   = 12000 ÷ 200 = 60

From the calculation above the marginal cost is constant with each additional unit change in the vehicle produced by General Motors.


Total revenue and marginal revenue

Units Price Total Revenue Marginal Revenue
100 $ 18,500 1850000 0
200 $ 18,500 3700000 9250
500 $ 18,500 9250000 11100
800 $ 18,500 14800000 6937.5
1000 $ 18,500 18500000 3700

PQ CURVE

The optimal production is 200,000 vehicles and the optimal price per units is $18500. For the company to remain profitable to should produce and sell at the above prices.

Capital budget costrelated tools

In order to focus and sustainably manage the cost implication in the future; the company should work on cost- support policies and harmonization of the policy principles. By adopting this cost effective tools the company will be able clearly define what share of costs that are required in the production of the vehicles. Furthermore, this will ensure consistent cost supported rates that can be permitted by the company.

Expansion Strategies

To expand into the global market, General Motors Company can undertake the following strategies. The company should pursue strategic alliance and acquisitions strategies with established automotive companies in different countries. This will enable the company expand it customer base as well as acquiring operational efficiencies and increase in intellectual capital.

Conclusion

It is of critical importance that General Motors should device ways of remaining profitable in the near future. The company has on the recent past been exposed to severe financial crisis that need to be addressed. To sustain its positive growth, they company should strive to expand its business linkages across the globe to facilitate cost absorption and capital gains.

 

 

References                                                                             

Arnold, R. A. (2011). Macroeconomics. Mason, OH: South-Western/Cengage Learning.

Boyes, W. J., & Melvin, M. (2012). Fundamentals of economics. Australia: South-Western Cengage Learning.

General Motors Company. (2012). General Motors Company. Retrieved from http://www.gm.com/

Bunkley, N. (2010). G.M. Posts Profit as Sales Rise 40 Percent. The New York Times. May 10, 2010, retrieved from http://www.nytimes.com/2010/05/18/business/18auto.html?_r=2