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Summary Frank Delaney owned and operated Delaney Motors, a General Motors automobile dealership in Ohio.

Its operations consisted of new-car sales, used-car sales, parts sales, vehicle lease and rentals, vehicle service, and automobile body repairing and repainting. The dealership was earning almost 5 percent on sales but the reported profit on the body shop operations seemed less profitable than Mr. Delaney had thought. Mr. Delaney asked us to analyze the body shop operation and make recommendations. Analysis 1.) We do not fully agree with the initial consultants exhibit. We suggest continuing the body shop and making some improvements. Since the body shop manager could claim, that because he exercises no control over the owners salary, this cost should not be charged to his department. We think this cost should have to be charged, because his salary should be allocated over all the departments. We agree that semi-variable costs can be allocated to operating departments in several ways, thereby better appraising departmental and managerial performance. We think the allocation of some of the semivariable costs should be done differently. Instead of the costs being allocated by percent of employee it should be allocated across the departments. Therefore legal and auditing cost and the owners salary should be allocated across the six departments. As a result we took the total $2113 legal and auditing costs and divided by the 6 departments, which is $352.17. Then the $3,600 from Companys Owners salary divided by the six departments to get the revised body shops owners salary. Thus, the increase in body shop semivariable costs should be the total of $352.17 and $3600, which is $3,952.17. (Details shown in Exhibit 1*). 2.) If the consultant were to report that Mr. Delaney may feasibly raise prices, we believe he should do so. Mr. Delaney did not consider profitability to be the major consideration in determining his course of action to improve the companys financial situation. He was concerned more prominently with providing high-quality work to his customers. If he were to increase prices and sell some products at a loss, this will not necessarily always a negative impact and may actually increase overall profit under certain situations, using a contribution pricing approach. A major fact he must consider with the option of raising prices is the pricing of his competitors. We analyzed the initial consultants data on other dealerships, and believe he should raise prices enough to increase his sales to possibly fall between the No. 6 and No. 3 competitors. This analysis assumes that the demand for the body shops products and services remains constant. In order to gain a competitive advantage along with raising his prices, it would be important to focus on improving the quality of the body shop and overall service provided. Another suggestion we would make that could increase profitability is to consider ways to reduce some of the body shops semivariable costs. 3.) We believe it is important for Mr. Delaney to take a course of action that he comfortable with. It is important to Mr. Delaney that his dealership provide high-quality body shop work to its customers and that if he leased the dealership it might provide below-standard service. Therefore, we do not feel that is a good option. We think Mr. Delaney should keep his dealership, but he needs to implement a system that provides a better analysis of

the costs and allocates them more accurately to each department. Once he has done this he should have a better understanding of his own costs and can then look at the competitors prices to make a more informed decision and identify areas where he could potentially cut costs. After he has this more reliable analysis he should raise prices if it is feasible to increase his profit and remain competitive. *Exhibit 1 Line 1 Sales: body shop 2 Gross profit: body shop 3 Gross profit percentage (line2/line1) Analysis of Semivariable Costs 4 Legal and auditing (body shop) 5 Owners salary (body shop) 6 Telephone and telegraph (body shop) 7 Total body shop semivariable costs 8 Legal and auditing (company) 9 Owners salary (company) 10 Telephone and telegraph (company) 11 Total company semivariable costs 12 Body shop percentage (line 7/line11) 13 Body shop employees as percent of total 14 Revised body shop semivariable costs (line11*line13) 15 Increase in body shop semivariable costs (line14-line7) Analysis of Fixed Costs 16 Body shop fixed costs, as now allocated 17 Total company fixed costs 18 Body shop percentage (line16/line17) 19 Revised body shop fixed costs (20% of line 17) 20 Decrease in body shop fixed costs (line 19- line 16) Summary of Findings 21 Net increase in costs (line 15- line20) 22 Unrevised body shop profit 23 Revised body shop profit (line 22- line 21) 24 Unrevised profit to sales (line 23/ line 1) 25 Revised profit to sales (line 23/line1) Initial HKS Consulting 306,652 306,652 91,107 91,107 29.7% 29.7% 0 0 839 839 2,113 21,600 21,676 45,389 1.85% 21.7% 9,867 9,082 6,106 28,815 21.19% 5,763 (343) 8,685 9,009 (324) 2.94% .1% 352.17 3,600 839 4,791.17 2,113 21,600 21,676 45,389 1.06% 4,791.17 3,952.17 6,106 28,815 21.19% 5,763 (343) 3,609.17 9,009 5,400 2,94% 1.76%