Team 3:

1. Sneha Neerugatti
2. D Pavan Kumar
3. Jaju Rohith
 Flow of presentation

Industry Info Company Info Departmental Info

Recommendations Questions Important Issues

 Industry Info

Discounts Inventory

New Entrants Educated Customers

 Andrew
North Country Auto, Inc. George
Liddy
Jones

Deals in new car & used car sales, Service, body and parts
department
In mid 1989 it started oil change concept as “while you wait”

1968 1983 25,000

Established New Location Operating Area
 Departmental Info

Service
Used car sales Body Shop

New Car Sales Parts

 New Car Sales

Sales manager (Alex Walker)

Six sales persons shared between new and used cars sales department

Office Manager and clerk shared between new and used cars sales department

Manager had flat salary plus fixed commission for sale of vehicle and percentage
of department profits* ( *Sales – Cost of vehicle sold)

Used car sales

Team

Sales Manager (Amy Robbins)

Six sales persons shared between new and used cars sales department

Office Manager and clerk shared between new and used cars sales department
Manager had flat salary plus fixed commission for sale of vehicle and percentage
of department profits* ( *Sales – Cost of vehicle sold)

Service

A Manager

Ten Technicians, Three semi-skilled mechanics, Two Counter clerks, Three Office clerks.

Total of 11 bays with hydraulic set-up. Service revenue consisted of labour only,

Manager had flat salary plus bonus on *departmental gross profit on labour hours
billed. (*Labour dollars billed – Total wages of Billable technicians and mechanics)
 Body Shop

A Manager

Three technicians and one clerk

Manager had flat salary plus bonus on *departmental profit

Parts
Team

A manager

Three Stock keepers and a two clerks

Manger is responsible for tracking parts inventory for the three lines and
minimizing both carrying cost and obsolescence cost
Manager had flat salary plus bonus on *departmental profit (*Total parts sold –
Cost of parts)
 Old System
 Operated as one business
 Salary and bonus was based on
overall profit of the company for
the year
Transfer Price doesn’t
have an impact on
salary and bonus.
New System
 Operated as separate
entities
 Salary and bonus based on
departmental profit
Transfer Price have an
impact on salary and
bonus
A recent new vehicle purchase has raised few concerns and a

meeting was held with all the department managers where the

following issues were raised by the respective managers.

01 Alex Walker
02 Amy Robbins
03 Service manager
04 George Liddy

How to Set the price between
new and old car sales
department while transferring
trade-in.
Is using full retail price for parts
and labour used in the repair of
trade-in is justifiable? He did not
understand why he was charged
full price
How can I charge less price for
service when I get parts for full
price?
Who should be responsible for
unexpected losses.
He was concerned about the
impact of capitalizing trade-in
repairs rather than expensing
immediately?
1. Using the data in the transaction, compute the profitability of this one transaction to the new, used, parts, and
service departments. Assume a sales commission of $250 for the trade-in on a selling price of $5,000. (Note:
Use the following allocations [new, $835; used, $665; parts, $32; service, $114) for overhead expenses while
computing the profitability, of this one transaction. These overhead allocations are also shown as Note 13 in
Exhibit 3.
 Solution model- 1

New Used Part Service

Revenue DP trade in loan $2,000 Sales $5,000 Brakes $125 Brakes $175
Trade-in $3,500 Lock $30 Lock $45
Loan $7,350 Full tune-up $80 Cleaning $75
Full tune-up $175

Total $12,850 $5,000 $235 $470

Cost COGS $11,420 Trade-in cost $3,500 1/1.4 from rev $167.86 1/3.5 from rev $134.29
OH $835 Repair and tune- $705 overhead $32 overhead $114
up $250
Sales commission $665
Overhead

Total $12,255 $5,120 $199.86 $248.29

Profit $1,895 ($120) $35.14 $221.71

 Solution model- 2

New Used Part Service

Revenue DP trade in loan $2,000 Sales $5,000 Brakes $125 Brakes $175
Trade-in $4,800 Lock $30 Lock $45
Loan $7,350 Full tune-up $80 Cleaning $75
Full tune-up $175

Total $14,150 $5,000 $235 $470

Cost COGS $11,420 Trade-in cost $4,800 1/1.4 from rev $167.86 1/3.5 from rev $134.29
OH $835 Repair and tune- $705 overhead $32 overhead $114
up $250
Sales commission $665
Overhead

Total $12,255 $5,120 $199.86 $248.29

Profit $1,895 ($1,420) $35.14 $221.71

 How should the transfer pricing
system operate for each department
market price, full retail, full cost,
variable cost)?

Question - 2
The transfer pricing system should be set to full retail price.
However, care should be taken to ensure that the retail
transfer price of the repairs does not encourage the used car
sales manager to avoid the possibility of losses in her
department by wholesaling trade in cars. That the dealership
could end up selling for a profit This could impact the
dealership by limiting the number of offers available.
Attractive to new car buyers As a result, while maximizing
profits in one's department, one should not have a negative
impact on the other departments
 If it were found one week later that
the trade- in could be wholesaled for
only $3000, Which manager should
take the loss?

Question - 3
Responsibility should fall on both the new car salesman and
the used car salesman. The new car salesman is at fault for
giving the customer $4,800 in value when the car was only
worth $3,500. The used car salesman is responsible for the
additional loss of $500 for being unable to receive market
value for the car. If the used car had a trade-in value at Blue
Book of $3,500, then the used car salesman alone would be
responsible for the loss of $500 in this transaction
 North Country incurred a year-to-date loss of about
$59,000 before allocation of fixed cost on the wholesaling
of used cars (see Note 2 in Exhibit 3). Wholesaling of
used cars is theatrically supposed to be a break-even
operation. Where do you think the problem lies?

Question - 4
It is possible that this loss occurred because new car
owners were giving customers looking to trade-in existing
cars above market valuations on their used cars. If new
owners were providing credit for $4,800 for a used car that
is worth $3,500, the used car group would have a difficult
time making a profit. While there would be times (like the
example above) where they could sell the car for $5,200
and still make a profit despite the inflated prices, most of
the time they will have difficulty selling the used car above
its Blue Book value of $3,500. Therefore, the used car
division may be operating at a loss because the cost they
are using for the used cars is too high.
 Should profit centres be evaluated on gross
profit or "full cost" profit?

Question - 5
Incentives should be based on company profits. A better
system should be established such that managers of the
two departments are given incentives based not on the
gross profits of their respective departments but on the
profits of the company as a whole. This would help ensure
that conflicts of the two departments will be lessened and
that the two departments will no longer compete but will
work together to enrich the value of the firm
 What advice do you have for the owners?

 The company's owners should ensure that the

managers of their various departments are properly
incented to do what is most profitable for the company
as a whole.
 Transfer Pricing, The company should most likely use
blue book values for the trade-in value and use that as
the cost to the used car division.
 Revised bonus system
Thank You