North country Auto

Introduction
Franchised dealer and authorized service

center for Ford, Saab and Volkswagen

New cars, used cars (front end) parts, service
and body shop (back end) were the
departments in the company
Aim was to keep the back end operations
profitable as the front end sales were under
pressure
The challenge was to change the structure
from a centralized to a decentralized profit
center

Question 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 $5000

New
Car

Used Car Parts

Service

Revenue

14150

5000

135+30+
80=245

175+45+
75+175=
470

Costs

(11420)

(750)

(167.86)

(134.29)

Commissio
n

(250)

Overheads

(835)

(665)

(32)

(114)

Question 2
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 market price system because the

department could cut off the non value added
costs for other department and still refer to
the market situation
The aim should be to maximize profits for
each of the departments but not at the cost of
other department

Question 3
If it were found 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 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 Book value, then the loss
reflected on the income statement and balance sheet
should only be $500.
The wholesale guidebook value for used cars is $3500
Hence the trade in is lower than the guidebook
This makes the Used car sales department manager
(Amy Robins) responsible for the loss.

Question 4

North Country incurred a year-to-date loss of about $59,000, before allocation of fixed costs,
on the wholesaling of used cars, which is theoretically supposed to be a break-even operation.
Where do you think the problem lies?

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.

Question 5
Should profit centres be evaluated on gross profit or full cost
profit?

Profit center should be evaluted at full cost

because:
Full cost not only includes COGS but will also
account for the traceable fixed cost related to
that profit center
This method could encourage the manager
responsible to control the cost precisely

Question 6
What advice do you have for the owners?

All NCAI managers should be gathered to

decide the fair transfer pricing.

By doing that, the decision making will be
accepted by all the managers and thereby
decrease any competition between them.
Each department should be evaluated by full
cost pricing system to control costs in a better
way
Proper incentives should be given to each
manager based not only on the department
performance but all the overall company

Thank You