NORTH COUNTRY
AUTO, INC.
Group IV:
Galing Priyatna
Gradithasari
Helmi Indra
BACKGROUND
Company information :
Franchised dealer and factory authorized service
center for Ford, Saab and Volkswagen.
Each of three manufacturers used a different
computer systems for tracking inventory and placing
new orders and required dealers to maintain an
adequate service facility with a crew of trained
technicians and spare parts inventory, level of
investment for each product line.
BACKGROUND
Company information :
The dealership was situated in an upstate New York
Town with a population of about 20000, served two
nearby towns of 4000 people as well as rural areas
covering a 20-mile radius.
North Country began operations in 1968,.
Owned as a corporation by George Liddy and
Andrew Jones.
Mr Liddy focused on new and used car sales.
BACKGROUND
Company information :
Mr Jones concentrated on managing the parts,
service, and body shop departments.
George Liddy was feeling pretty good about the
new control systems recently put in place for his
five department managers (new and used car sales,
service, body, and parts departments). He strongly
believed in the concept of evaluating each
department individually as a profit center.
BACKGROUND
Industry Information
• Aggressive discounting
• High inventories (exhibit 1)
• More educated customer
• Proliferation of new entrants
BACKGROUND
Industry Information
• Industry analysts estimated that fewer than
50% of dealers in the US would make a
profit on new car sales in 1990
• Overall net profit margins were expected to
fall below 1% of sales (the wall street journal.
Dec 11, 1989)
DEPARTMENTAL STRUCTURE
North Country Auto, Inc.
New Car
Sales
Used Car
Sales
Service
Parts
Body
Shop
IMPORTANCE ISSUES
Before
George
Liddy
• All five departments operated as a part of one business.
• Department managers were paid salaries and a year end bonus determined at the
owner’s discreation based on overall results for the year and subjective appraisal
of each managers.
• This system did not provide proper motivation for the managers.
George Liddy
“The New
Control
Systems”
• All five departments were operated as profits centers.
• Mr. Liddy believed in decentralized profits centers and performance-based
compensation as superior models of control.
• He instructed each of his departmental managers (new, used, service, body, and
parts) to run his/her department as if it were an independent business.
• The management of each department were awarded bonuses based on
departmental Gross Profit.
The
Potential
Problems
• In addition to finding a way to effectively track departmental
performance, George Liddy had to devise a sensible system for
transfer pricing.
• Mr. Liddy acknowledge that a complex interrelationship existed
among the profits centers in the course of normal business
transactions.
QUESTIONS
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 $5,000. (Note:
Use the following allocations [new, $835; used, $665;
parts, $32; service, $114] for overhead expenses while
computing the profitability of this one transaction. These
overhead allocations are also shown as Note 13 in Exhibit
3.)
QUESTIONS
② How should the transfer-pricing system operate for each
department (market price, full retail, full cost, variable
cost)?
③ If it were found one week later that trade-in could be
wholesaled for only $3,000, which manager should take
the loss?
QUESTIONS
④ North Country incurred a year-to-date loss of about
$59,000 before allocation of fixed costs on the
wholesaling of used cars (see Note 2 in Exhibit3.)
Wholesaling of used cars in theoretically supposed to be
a break-even operation. Where do you think the problem
lies?
⑤ Should profits centers be evaluated on gross profit or
“full cost” profit?
⑥ What advice do you have for the owners?
ANSWER (1)
New
Revenue
DP
Trade in
Loan
Total
Cost
$2,000
$4,800
$7,350
Used
Sales
$14,150
COGS
OH
$11,420
$835
Part
$5,000
Brakes
Lock
Full Tune Up
$5,000
Trade-in cost
Repair & Tuneup
Sales Commission
Overhead
$4,800
$705
$250
$665
Service
$125
$30
$80
Brakes
Lock
Cleaning
Full Tune Up
$235
1/1.4 from rev
Overhead
$167.86
$32
$175
$45
$75
$175
$470
1/3.5 from rev
Overhead
$134.29
$114
Total
$12,255
$6,420
$199.86
$248.29
Profit
$1,895
($1,420)
$35.14
$221.71
Total Profit : $731.85
ANSWER (1) - ALTERNATIVE
New
Revenue
DP
Trade in
Loan
Total
Cost
$2,000
$3,500
$7,350
Used
Sales
$12,850
COGS
OH
$11,420
$835
Part
$5,000
Brakes
Lock
Full Tune Up
$5,000
Trade-in cost
Repair & Tuneup
Sales Commission
Overhead
$3,500
$705
$250
$665
Service
$125
$30
$80
Brakes
Lock
Cleaning
Full Tune Up
$235
1/1.4 from rev
Overhead
$167.86
$32
$175
$45
$75
$175
$470
1/3.5 from rev
Overhead
$134.29
$114
Total
$12,255
$5,120
$199.86
$248.29
Profit
$595
($120)
$35.14
$221.71
Total Profit : $731.85
ANSWER (2)
How should the transfer-pricing system
operate for each department (market price,
full retail, full cost, variable cost)?
a. New Car Dept – Used Car Dept : Market
Price
b. Used Car Dept – Service & Part : Full Cost
+ Markup
ANSWER (3)
If it were found one week later that trade-in
could be wholesaled for only $3,000, which
manager should take the loss?
Used Car Department Manager
ANSWER (4)
North Country incurred a year-to-date loss of about $59,000
before allocation of fixed costs on the wholesaling of used
cars. Wholesaling of used cars in 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
managers were giving trade-in allowance above the market
valuations.
ANSWER (5)
Should profits centers be evaluated on gross
profit or “full cost” profit?
Gross Profit
6. ADVICE FOR THE OWNERS
1. BETTER STRUCTURE
New Car Sales, Used Car Sales and Service
Departments remain as profit centers.
Parts and body shop departments changed to
cost centers because the division managers did
not have direct or influential control on the
division’s profit.
2. TRANSFER PRICING
Use book values for the trade-in value for new
car division and use that as the cost to the
used car division.
Allow for higher trade-in values with clear
responsibility among departments
Full cost plus mark-up to be used from parts
and body shop to other departments.
3. REVISE BONUS SYSTEM
The company should revise managers bonus
system, so they can be measured not just by
their own departments profits, but the
companys profit as whole.
Q&A