Harnischfeger Case

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Harnischfeger Corp I. Introduction In 1984 Harnischfeger Corporation was a leading producer of construction equipment. During the decade of the 1970s the company experienced tremendous growth. Annual sales grew from $150 million in 1970 to $646 million in 1981. However the company began to experience financial trouble in 1979. This was caused by a variety of factors: the company wasted a large amount of resources on an unsuccessful merger, the government of Iran defaulted on a $20 million order of equipment after the fall of the Shah, and the U.S. economy was in a period of recession with double digit rates of inflation. The company posted an operating loss in 1979 for the first time since 1938. The company's financial difficulties…show more content…
Second, Harnischfeger did phase out its own manufacture of construction cranes in Michigan and enter into a long-term agreement, under which Kobe would supply construction cranes. Also, effective November 1, 1983, Harnischfeger adjusted some subsidiaries’ ending period to September 30 instead of the previous ending July 31. This had the effect of lengthening the 1984 reporting period for these companies from 12 months, to 14 months, and increased sales by $5.4 million. Assuming these companies had the same profit margin as the parent, the change increased cost of sales by $4.3 million. We agree that the influence on net income is immaterial and that this change reflects more effectively the subsidiary’s business operation. But it does represent a one-time event which should be corrected for during analysis of the company’s potential for future profitability. Effect of Changes in Depreciation Method In 1984, Harnischfeger changed its depreciation policy for financial reporting purposes to a straight-line method from a principally accelerated method. A net income of $11 million was realized for 1984 when the straight-line method was applied retroactively to all assets depreciated under the accelerated method. The management viewed this as an approach to match the company’s standard with that of industry peers. We

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