North Country Auto, Inc Essay

Each of the naval divisions of northeasterly res publica Auto, Inc. namely, the raw motor simple machines sales and utilize motor railroad autos sales, serve up, parts, soundbox shop and oil change operated as part of one argument before George Liddy bought into the dealership. The Department Managers were paid salaries and a year-end bonus. However, feeling that this musical arrangement would non motivate employees, he devised a system wherein he could cut effectively the surgical incisional performance. For this, he developed a system for so that each department entrust be treated as change gather centers. This rising system requires that comprise be broken bundle per department. Also, the bon social functions per each department head give be idead on departmental gross usefulnesss. So far as the outcome of the vernal system is concerned, a recent vernalborn automobile purchase sparked clangoring and disagreements among division heads on the matter of lay of transfer prices and allocation of be and get. It was important that as one department aims to maximize net profit, it does not negatively affect other departments. Issues that needed to be resolved include setting of transfer prices surrounded by departments, formalizing intercomp any(prenominal) proceedings, the divisional structure (use of profit or comprise center), and the proper allocation of company dinero among departments. ProblemThe different departments of marriage Country Auto, Inc. must choose between three set systems base on foodstuff price, full retail better than others, and based on bind descent value. Also, the company must decide whether they should continue treating each department independently in order to gain huge profits considering that the passenger cars incentives be determined upon the departments earnings. Point of cypher In this case, we take the point of view of George Liddy, owner of North Country Auto, Inc.AnalysisIn examini ng the issues faced by the company, the car purchase discussed in the interdepartmental meeting is use as case. Companys flow operationComparison-retail full price considered ( hot car sold for $5200 without any repairs) -book value considered ( employ car sold for $5200) Revenue Costs Profit in the altogether car (full retail price) $14,150 , $11,4 , 20 , $2,7, 30, used car (book value) , 5200, 4800 , 400 Price-transfer shown by profits guide book value at wholesale and assume market Price $3,500 , retail price 5200 , mickle in allowance 4800The trade in allowance of $4800 is the value that is essentially believed by the youthful and used car sales force believes that the car place be sold. Considering the market price of $3500, the calculated profit is $1700. But, it should be recognized that this profit is at the expense of the $1300 profit from the initial transaction. This is due to the difference between the cars trade value ($4800) and the market price ($3500). With this, the used car manager must get a line the credit or consequences for the profit or issue. This is due to the fact that the used car managers are the entrance ones to receive incentives in plowing the used cars. On the other hand, the new car managers are the ones to receive the incentives in increasing the switch value of the cars preceding(prenominal) the market value. This in turn, makes it easier for people to buy new cars. The illustration above brings up the issue of having the used car manager receive incentives because of the cars value determined by the new car managerExplanation on $59000 handout on wholesaling of used carsThe loss may bedevil occurred because new car owners are pushing for swap car values above market valuations on their used cars. For example, if new cars are sold for $4800 and used cars for $3500, the used car group would pee-pee a difficult time qualification a profit. This is because they may have sold the car for $5200 (as shown in the example above). Most of the time, it will be hard for the used car department to sell the used cars above its book value of $3500. Thus, the used car division may determine loss since they are using address for the used cars that is too high. RecommendationsIncentives 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 theprofits 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 cope but will work together to enrich the value of the securely. In order to be more profitable, the firm could use blue book values for the change value and use that as the cost to the used car division. However, if it is better for the firm to admit added incentive to customers to trade in their cars, the firm could allow for higher trade-in values bu t function for those added costs should reside in the new sales division. Regarding the issue of costs, whether it should be at wholesale or retail, it should be considered that North Country is a company offering more on services. The cost of service of m homogeneousg the cars sellable differs minimally from the market price. And these service costs should be added to the cost of used cars in wholesale. The profit on repairs must be akin to competitors values as well as to the industry. hesitancy and ANSWERS1. exploitation 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 this trade-in on a selling price of $5000. (note use the following allocations new,$385 used,$665 parts,$32 service,$114 for budget items expense while computing the profitability of this one transaction. These overhead allocations are also shown as Note 13 in certify 3.)Using the data in the t ransaction , 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 $50002. How should the transfer pricing system operate for each department (market price, full retail, full cost, variable star cost)?The transfer pricing system should be operated at full retail . But at the same time care should be taken that the retail transfer price of the repairs should not encourage the used car sales manager to avoid the possibility of losses in her department by wholesaling trade in cars thatcould be resold at a profit for the dealership. This cud hurt the dealership by making its deals less lovely for new car customers. Hence while maximizing profits in ones department it should not affect the other departments negatively.3. If it were build one week later that the trade-in could be wholesaled for only $3000, which manager should take the loss? If the used car is sold at sell for $3,000 after the trade-in value was set at $4,800, the company should note a loss of $1,800. However, if the new car salesman only gives $3,500 of value to the new customer based on the Blue intensity value, then the loss reflected on the income statement and balance sheet should only be $500. In the case of the $1800 loss, responsibility should fall on both(prenominal) the new car salesman and the used car salesman. The new car salesman is at fault for self-aggrandizing 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 unavailing 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.4. North Country incurred a year-to-date loss about $59.000 before allocation of unconquerable cost on the wholesaling of used cars (see note 2 in Exhibit 3). Wholesaling of used cars is the theoretically supposed to be a break-even operation. Where do you stand for the problem lies? 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(prenominal) 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.5. Should profit centers be evaluated on gross profit or full cost profit?Incentives should be based on company profits. A better system should be established such that manager s 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 deal but will work together to enrich the value of the firm.6. What advice do you have for the owners?The owners of the business should make sure the managers of their various groups are aright incented to do what is most profitable for the firm as a whole. Probably, the firm should use blue book values for the trade-in value and use that as the cost to the used car division. However, if it is better for the firm to provide added incentive to customers to trade in their cars, the firm could allow for higher trade-in values but responsibility for those added costs should reside in the new sales division. On the other hand, if a case can be made that the used cars are worth more to this organization than to the market as a whole because they have an ability to consistently sell used cars above blue book value or because the service organization can increase those used cars more than other organizations can at similar cost, the additional costs of allowing trade-ins above Blue Book value might be appropriately split between both the new car and used car divisions.