Shuman Automobile Inc- Dealership Contribution, Value of Trade, Charge of Repairing Department - Case Study Example

Table of Contents Introduction 2 Dealership Contribution 2 Value of Trade in Transferred 3 Charge of Repairing Department 4 Contribution of Each Department 4 New Car Department 4 Service Department 4 Used Car Department 5 Alternate Strategy for the More Contribution 5 Profit Center Cost Appropriation 5 Conclusion 6 References 7 Shuman Automobile Inc. Introduction With the inception of the retirement of the active partner from day to day management of the operations it was seemed appropriate to divide the business in different segments and report as one. The business was then divided in three different departments as new cars sales, used cars sales and service departments. All of the three departments of the business were assigned a separate manager that was from the long-term employees of the business and they were made the head of the departments as well. All the three departments were considered as the profit center and the amount of profit directly affects the salaries of the managers as they were to be paid according to the percentage of the profit that their department makes. With the current structure and strategy an incident of trading in of a used car for the new car is analyzed where different roles of employees of each of the department where examined. The price at which the interdepartmental sale should be recorded is a question at hand and is discussed in this report. In accordance with the transaction of trade in the departments are analyzed as for how befitting the new strategy shall be for the whole business. The current strategy of departmentalization is analyzed along with the suggestions so as to benefit the business as a whole. Dealership Contribution Contribution of a product is calculated by subtracting the direct costs of the product. The contribution is the profit that the product provides to the company. With the appropriate costs that are incurred upon the product are accumulated and then subtracted from the selling price the contribution can be ascertained. In this case the cost of the car sold is segmented in different types. The cost of the sold car includes the followings: Purchase price of the car from manufacture $8,890 Trade in allowance $4,270 Total $13,160 The cost of the car that has been sold amounts to the total of $13,160 where the selling price is $12,800 and thus amounting to the net loss of $360. This not the only loss that the dealership would suffer but the over allowed trade in value of the used car that the dealership bought shall be resulting in a loss too as the price is much different from what is allowed along with the costs of repairmen that it will cost. The cost to the dealership shall be as: Purchase Price $4,270 Cost of repair $1,376 Cost of axle repair $530 Total cost $ 6,176 The total cost of the used car that is for the dealership as a whole totaled $6,167 and this car would sale at the price of $3,700 and thus amounting to the net loss of $2,476. With all of the calculations ascertained the whole transaction shall be beneficial for the dealership as a whole and will amount to the total contribution as follows: Sale Price $ 12,800 Less: Cost from Manufacturer $8,890 Loss from the trade in car $2476 Contribution $1,434 Value of Trade in Transferred When all of the three departments are considered as a profit center it is to be ascertained that the price at which each of the department shall transfer the product should be at the cost plus profit margin (Stewart, 2009). The other department shall have the discretion so as to decide the price at which the product should be transferred. The cost for the new car department shall be the purchase price that the new car department has purchased for. The cost for the new car department shall be the purchase price of the car and thus it shall not sell under the allowed trade in price that he has accounted for. The departments shall be able to negotiate the price and then it shall be transferred (Yair & Paul, 2014). The values of the transfer price shall be at the fair agreed upon values. For the used car the new department shall be demanding the price at least $4,270 while the used car department shall not go over $2,930. The settlement shall be between these price ranges the used car department shall be possessing more bargaining power as it has to buy the car and the new car department has been negligent in allowing for trade in value (Alan, 1999). The new car department shall transfer the car at the price of $ 2,930. Although the old car department shall be ascertaining that the cost of the repairs to the car shall be amounting to $1,376 but with the market conditions prevailing and the loss occurred to the new car department the transfer price shall be $2,930. Charge of Repairing Department When each of the department is set as a profit center then it is upto the management of that department to earn profit and transfer the products with prices that involves profit margins so as to gather more interest and profit for the department. With the salaries and the remunerations of the directors depending upon the profit of the department the transfer pricing shall be profit above cost. however as the business is one entity and the different departments form the part of it then the product shall be transferred at a price which shall not include high profit margin as the end customer shall be suffering all of the profit margins when the price go up. The service department should be charging the cost of the repairs that shall be from $1,376 to $1,660 as it is the range between the cost and that of the profit. According to the scenario the cost of the repairs shall be at the cost of $ 1,376 and thus the service provided shall be at the minimum this price. As the service department is a profit center and it has to generate its profits as well then the cost of the repairs shall not be the price that the service department will charge but it shall be charging the profit over it as well. The price charged by the service department to the used car department shall be $1,660 for the repair. Contribution of Each Department The contribution upon this deal for each of the department shall be as follows: New Car Department The contribution is the difference between the transfer price and the cost of the product. For the new car department the transfer price is $2,930 and the cost of the car shall be $4,370 and thus resulting in the loss of $1,440. Service Department The service department shall be charging more than the cost to the used car department for the job of repairing at the price of $1660. The cost of the repair for the service department shall be $1,376 and thus the contribution that the service earns will be $ 1,524 (1660 – 1376). Used Car Department The cost that the used car department shall be incurring for the car will be the price at which it is transferred from the new car department that is $ 2,930 and the cost of the repair charged by the service department i.e. $ 1,660 which shall be totaling to the sum of $ 4,590. The selling price of the car for the used car department shall be no more than $3,700 and thus the used car department shall be bearing a loss of $890. Alternate Strategy for the More Contribution The strategy already implied by the business shall be resulting in the contribution for the business as whole for the whole of the transaction but the transfer pricing of the used car shall be amounting to the loss to two of the departments which are new car department and used car department and only the service department earns a profit. The alternate strategy in which the profit that is ascertained from the whole transaction is realized for each of the department and not only for the new car department and it is proportioned accordingly to each of the department so as to minimize the cost to each of the department (Robert, et al., 2008). The service department shall be providing the services of repairs and maintenance and shall not change the price (Wagdy & Ahmed, 2009). The new car department and the used car department shall allocate the profit that is earned from the sale of the new car with allowance of the old car and thus the contribution of the both the department shall increase (Albert, 2002). Besides it is the negligence of the manager of the new car department to allow for high value that is then burdened upon the used car department. Profit Center Cost Appropriation The profit center approach is feasible to a certain extent as the cost are incurred in all three of the departments and if they transfer the price which include profit margin then the profit center can be ascertained. It is not the most appropriate strategy as the cost of one wrong decision shall be following the whole company and shall be ending in the suffering and bearing by one department as which can be seen in this case where the used car department is affected the most. Although the new car department transferred at a loss but the profit earned from the sale of the new car is beneficial for that department. There shall be two profit centers in the company that shall be the new car department and the old car department and the service center shall be the cost center and the cost of the cost center shall be absorbed in the product by both of the profit centers (Seth, et al., 2005). Transfer pricing of shall be at cost between all the departments and there shall be a mutual coincidence between the new car department and the old car department so the decisions taken are beneficial for the whole of the company (Connie, et al., 2003) and not only for a single department (Alberto & Timur, 2013). Conclusion With the analysis of the case of the company and transaction that took place it is realized that the departments of the company seemed to benefit themselves besides of benefiting the business as a whole. The contribution to the whole business is ascertained and the contribution to each of the department is realized as well. Had it been working in mutual collaboration then the allowed price for the used car shall be much different and it shall be benefiting the whole company. With the changed that are required in the strategy it is ascertained that the operations of the company shall be much beneficial with certain changes where two departments are profit centers and one is a cost center. BIB References Alan, S., 1999. Transfer Pricing and its Misuse. European Journal of Marketing, 13(4), pp. 167 - 171. Albert, G., 2002. Transfer Pricing – Choice. Management Decision, 28(3), pp. 14-27. Alberto, D. M. & Timur, N., 2013. Earned value-based performance monitoring of facility construction projects. Journal of Facilities Management, 11(1), pp. 69-80. Connie, R. B., Neil, C. H. J. & John, P. F., 2003. THE TRANSFER PRICING DECISION PROCESS FOR MULTINATIONAL CORPORATIONS. International Journal of Commerce and Management, 7(3/4), pp. 13-38. Robert, A. M., Philippe, R. & Christophe, N. B., 2008. Earned value management insights using inferential statistics. International Journal of Managing Projects in Business, 1(2), pp. 288 - 294. Seth, B., Liz, M. & Nan, S., 2005. VolunteerMatch.org: balancing mission and earned-revenue potential. Strategy & Leadership, 33(2), pp. 17 - 23. Stewart, J., 2009. Transfer Pricing: Some Empirical Evidence from Ireland. Journal of Economic Studies, 16(3), pp. 8-15. Wagdy, M. A. & Ahmed, S. M., 2009. Do multinational companies have effective transfer pricing systems of intangible assets and e-commerce?. International Journal of Commerce and Management, 19(2), pp. 115 - 126. Yair, H. & Paul, N., 2014. An introduction to transfer pricing. ournal of Management Development, 33(1), pp. 57 - 61. Read More