North Country Auto, Inc Essay

Each of the departments of North Country Auto, Inc. namely, the juvenile cable gondolas sales and use autos sales, returns, parts, body shop and oil change operated as part of one business before George Liddy bought into the dealership. The Department Managers were paid salaries and a year-end bonus. However, feeling that this governing body would not motivate employees, he devised a strategy wherein he could track effectively the departmental performance. For this, he developed a system for so that each department will be treated as decentralized profit centers. This new system requires that apostrophize be broken wipe out per department. Also, the bonuses per each department head will be based on departmental glaring profits. So far as the outcome of the new system is concerned, a recent new car corrupt sparked friction and disagreements among division heads on the matter of setting of ecstasy legal injurys and allocation of cost and profits. It was important that as one department aims to maximize profit, it does not negatively affect other departments. Issues that needed to be obdurate include setting of transfer prices mingled with departments, formalizing intercompany transactions, the divisional structure (use of profit or cost center), and the graceful allocation of company profits among departments. ProblemThe different departments of North Country Auto, Inc. must choose between three pricing systems base on securities industry price, full retail better than others, and based on book take account. Also, the company must decide whether they should continue treating each department independently in severalize to gain huge profits considering that the managers incentives are determined upon the departments earnings. question of View In this case, we take the point of view of George Liddy, owner of North Country Auto, Inc.AnalysisIn examining the thin outs faced by the company, the car purchase discussed in the interdepartmental meet ing is utilise as illustration. attach tos current operationComparison-retail full price considered (new car sold for $5200 without any repairs) -book judge considered ( utilize car sold for $5200) Revenue Costs Profit new car (full retail price) $14,150 , $11,4 , 20 , $2,7, 30, utilize car (book mea genuine out) , 5200, 4800 , 400 Price-transfer shown by profits guide book value at wholesale and assumed market Price $3,500 , retail price 5200 , trade in valuation reserve 4800The trade in allowance of $4800 is the value that is essentially believed by the new and employ car sales force believes that the car idler be sold. Considering the market price of $3500, the calculated profit is $1700. But, it should be recognized that this profit is at the depreciate 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 utilise car manager must receive the credit or conseque nces for the profit or outlet. This is due to the fact that the employ car managers are the appropriate ones to receive incentives in selling the apply cars. On the other hand, the new car managers are the ones to receive the incentives in increasing the trade-in value of the cars to a high place the market value. This in turn, makes it easier for people to buy new cars. The illustration above brings up the pick out of having the used car manager receive incentives because of the cars value determined by the new car managerExplanation on $59000 red on wholesaling of used carsThe loss may cave in occurred because new car owners are pushing for trade-in car values above market valuations on their used cars. For face, if new cars are sold for $4800 and used cars for $3500, the used car group would cede a difficult clipping making a profit. This is because they may have sold the car for $5200 (as shown in the case above). Most of the cartridge holder, it will be hard for th e used car department to sell the used cars above its book value of $3500. Thus, the used car division may incur loss since they are victimisation cost 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 make profits of their respective departments simply on theprofits of the company as a whole. This would help image that conflicts of the two departments will be littleened and that the two departments will no longer compete plainly will work together to enrich the value of the sign of the zodiac. In order to be much profitable, the faithful could 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(prenominal) trade-in values but responsibi lity 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 religious offering more on services. The cost of service of making 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 opponents values as well as to the industry.QUESTION and ANSWERS1. Using the data in the transaction, picture 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 overhead expense while cypher the profitability of this one transaction. These overhead allocations are also shown as Note 13 in process 3.)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 $50002. How should the transfer pricing system operate for each department (market price, full retail, full cost, variable 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 attractive for new car customers. Hence while maximizing profits in ones department it should not affect the other departments negatively.3. If it were found 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 auction for $3,000 later 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 prevail 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 locate on both the new car salesman and the used car salesman. The new car salesman is at charge for giving the customer $4,800 in value when the car was only worth $3,500. The used car salesman is trusty 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 entirely would be responsible for the loss of $500 in this transaction.4. North Country incurred a year-to-date loss virtually $59.000 before allocation of fixed cost on the wholesaling of used cars (see note 2 in gift 3). Wholesaling of used cars is the theoretically supposed to be a break-even operation. Where do you think 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 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 managers of the two departments are given incentives based not on the gross profi ts of their respective departments but on the profits of the company as a whole. This would help chink 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.6. What advice do you have for the owners?The owners of the business should make sure the managers of their various groups are properly 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 us ed 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.