Manager: Automobiles and Service Department Essay

Question #1 – Suppose the new-car deal is consummated, with the repaired used car being retailed for $7,100, the repairs costing Shuman $1,594. Assume that all sales personnel are on salary (no commissions) and that general overhead costs are fixed. What is the dealership incremental gross profit on the total transaction (i. e. , new and repaired-used cars sold)? Answer |Sales Revenue | | | Sales of new car |$14,400 | | Sales of repaired-used car |$7,100 | | Total |$21,500 | |Cost of Sales | | | Cost of new car |$12,240 | | Trade in value on used car |$6,500 | | Cost of reconditioning |$1,594 | | Total |$20,334 | |Gross Profit |$1,166 |. Question #2 – Assume each department (new, used, service) is treated as profit center, as described in the case. Also assume in a-c that it is known with certainty beforehand that the repairs will cost $1,594. a. In your opinion, at what value should this trade-in (unrepaired) be transferred from the new-car department to the used-car department? Why? b. In your opinion, how much should the service department be able to charge the used-car department for the repairs on this trade-in car? c. Given your responses to a and b, what will be each department’s incremental gross profit on this deal? Answer 2-a: i) If Paul should take responsibility that he failed to find the rear axle crack. The value of this trade-in should be at least $5,000, which is the number Paul think he could buy from used car auction. If Paul should not take the responsibility Reconditioning charge from Service department =Cost of repairs * Service Department gross profit mark-up = $1594 * ($2,000/$1,480) =$2,154 Value of Trade-in to used-car department =Wholesales price – Reconditioning charge =$6,100 – 2,154 =$3,946 Answer 2-b: As calculation of reconditioning charge from Service department above Answer 2-a. The Service department should charge the repair to used-car department by $2,154 Answer 2-c: i) Use the accounting rule which is done by Brunner for internal transfer cost, it comes out the table of â€Å"Current Split† below to show gross profit of Shuman and all three departments ii) If we let Paul take the responsibility for costing error on used car appraisal, and allow Service department to charge the internal job the same as they would do for external customer. The gross profit would be as shown in the table of â€Å"suggestion for split† below. iii) |[pic] | | |[pic] | | Question #3 -Is there a strategy in this instance that would give the dealership more profit than the one assumed above (i. e. , repairing and retailing this trade-in used car)? Explain. In answering this question, assume the service department operates at capacity. Answer 3: a) Should have Service department do a quick inspection of the used car and find the problem as many as possible, so sales department could have better position and knowledge to negotiate at lower used car allowance. b) Assume the service department operate at capacity, the incremental gross profit on the total transaction should be only counted by $660 (earned by Moyer) – $54 (loss by Fiedler) = $606. If Moyer could sell the new card at less than 10% discount (8% is competitive already) without using used car allowance. The gross profit for the dealership could be more. (10% discount, gross profit = $720 still higher than $606) c) Fiedler could try if the customer is interested to commission his department to sell his card at very minimal charge in addition to the sales result described above in answer 3-b. d) Bianci could quote $2,154 or above if the customer is interested to repair his car in his department. Question #4 Do you feel the three-profit-center approach is appropriate for Shuman? If so, explain why, including an explanation of how this is better than other specific alternatives. If not, propose a better alternative and explain why it is better than three profit centers and any other alternatives you have considered. Answer 4: Yes, we think the three-profit-center approach is appropriate for Shuman because all three departments could run business independently to service both external and internal customers. However, the internal cost transfer should be reviewed and revised to match market bench mark. It would help Shuman Automobiles a) Both new-car and used-car department could have more accurate cost base to make the decision for a sales deal. b) The service department could be motivated to reduce their cost and increase revenue. However, the approach might reduce the level of cooperation among the department and decrease customer benefit of â€Å"one stop shopping† in Shuman. In order to address this potential issue of conflict interest among the department, we suggest the other program could be implemented (1) The entire dealership profit should be also factor in as part of manager’s remuneration. . (2) Service department should give internal job at priority while they operate at capacity, and offer discount charge while they operates over capacity.