This is the first real-world case I cover in my introductory financial class and I cover it at the end of chapter 4. It is also the first time I introduce my students to real world financial statements. Part of the challenge is identifying Sales, Cost of Goods Sold, Gross Profit, and Net Income on two real-world income statements. Students start to see that companies format their income statements differently and use different account titles.
Difficulty: Medium / Hard
Learning Objectives: 4-1 and 4-8
Implementation Ideas: 1) Students work the case in groups of 3-4 and then we have a class discussion (class time: 20-25 minutes) , 2) Assign case out-of-class and then discuss in class (class time: 10 minutes)
Handouts and Solution for Case #1 available on Resources Page
Did I pay too much for my car?
Jason recently purchased a new Ford automobile from a dealer near his home. When he told his friend Ryan that he was able to purchase the car for $1,000 less than the sticker price, Ryan told Jason he had gotten a lousy deal. “Everybody knows there’s a huge markup on cars,” Ryan said. “You could have gotten a much lower price if you’d shopped around.”
Jason responded, “If there’s such a big profit margin on cars, why did so many of the car manufacturers get into financial trouble?” Ryan told him that he was confusing the maker of the car with the dealer. Ryan argued that although the manufacturers may not have high profit margins, the dealers do, and told him again that he had paid too much.
The exhibit below presents the income statements for Ford Motor Company (Manufacturer) and AutoNation, Inc. (Dealer) .
Calculate the gross margin on a new vehicle for AutoNation and Ford?
If you pay $20,000 for a vehicle from a dealership operated by AutoNation how much did the car cost the company? Also, how much did the car cost the Ford Motor Company to manufacture?
Calculate the net income margin for AutoNation and Ford?
Do you agree with Ryan that Jason paid too much?