North Country Auto

1972 Words8 Pages

1. Executive Summary

North Country Auto, Inc. was restructured by George Liddy so that each department will operate as an independent profit center. However, a recent new car purchase sparked friction and disagreements among division heads on setting of transfer prices and allocation of costs 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 resolved include setting of transfer prices between departments, formalizing intercompany transactions, the divisional structure (use of profit or cost center), and the proper allocation of company profits among departments. After doing the analysis, it was decided
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When looking at profit before common expenses, the Parts Department revealed the highest profitability.

New Used Service Body Parts
Sales 6558 1557 672 231 1417
Gross Profit 502 189 421 145 361
Profit before comm. Exp 10 7 50 21 178
Profit Margin 0.15% 0.45% 7.44% 9.09% 12.56%
Number of Units 474 390
Profit per unit 1.06 0.48
Table 1. Profit per division, 10/31/89

The bulk of the profit for the company is from Parts department, followed closely by Service and Body departments. New and Used Car department make up about 1% and 2% respectively of the total profit realized from the operations.

Analysis of Recent New Car Purchase

From Table 2, it can be seen that the purchase of a new car resulted in varying levels of profitability across divisions. The used car department even made a loss, and with the high mark up value for the Service Department, it made high profit when compared to costs.

New Car Dept Used Car Dept Parts Department Service Dept Price w/Markup (1.4) Price w/Markup (3.5)
Sell Price 14150 Sell Price 5000 Brakes 125 175 Brakes 175 612.5
Trade-in Allowance 4800 Book Value 3500 Locks 75 105 Locks 45 157.5
Cost of car 11420 Trade-in Allowance 4800 Tune Up 80 112 Tune Up 175 612.5
Allocated Cost 835 Brakes 300 Subtotal 280 392 Cleaning 75 262.5
Gross Margin 2730 Locks 75 Profit on sale 112 (392-280) Subtotal 470
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