Shuman Automobile

1) Issues:
Should we move to a structure that involves 3 profit centres? Should the service department be able to charge for internal work? It appears as if the accountant needs some training. 2) Background:

The owner is preparing to retire from actively running the business. As a result, he wants to gradually move away from day to day involvement. In order to do so, he sees a need for a formal control system to ensure the dealership will remain profitable. Current system is him personally controlling the activities of the business. 3) Environment/KSF

We don’t know a whole lot about the environment. We do know that Clark Shuman believes that success comes from pushing new car sales, and giving good customer service in order to get repeat business. Seems to be a successful business, staff seem to be committed. Price is critical in the car selling business.

Conclusion:

KSF – For whole company
Sell new cars – everyone should keep this in min. Competitive prices to keep customers happy. Good quality service at a reasonable price. Maintain a good reputation in the community. KSF – New Car Sales

Offer good prices, easily negotiated by purchaser. Have stock on hand for customers to see/purchase. Make good trade in-deals, so the deal is profitable. Keep costs in mind – especially costs related to inventory. KSF – Used Car Sales

Provide good estimates to new care dept on trade in values. Same as new car dept KSF – Service Dept
Quality repair job. Good price – so must keep costs down. Service – turnaround time, provide rides, etc.Treat customers well.

4) Current MCS and its strengths and weaknesses
Old system was personal control by Clark Shuman. He watched all the transactions and made sure the proper decisions were made and helped work out differences between departments. If he is going to be less available, then it is time to develop a more formal system.

5) Analysis
a. What is proposed change?
To a system of three Profit Centres. Each manager gets paid based on a percentage of the gross profit for their department, and is expected to act as if they are managing three independent businesses. b. Are they really independent?

They do have to work together. Paul has the job of valuing trade ins, Janet has to sell to him at his appraised value (or she would probably sell outside) and Nate has to do any needed reconditioning work – currently at cost. c. What problems do you see?

Why should Nate do reconditioning work at cost? His dept is a profit centre, and this will encourage him to do customer service work as a priority, which is probably reasonable, but there is no incentive for him to ever get around to doing the internal work as there is no profit, and also no reason for him to keep the cost down because he is paid what ever the actual cost is. Also, if his department is at capacity, then he has to give up work on which he makes 35% to do work on which he makes nothing.

Why would Paul want to fairly appraise Janet’s trade-ins when he ends up having to take them off her hands, and resell them at a profit? He’s going to want to take his time with the evaluation and make sure he properly identifies any repairs that are needed, which is probably a good thing to do, but Janet cannot afford for him to take this amount of time, when she is trying to seal a deal with a purchaser.

What alternatives does Janet have if Paul refuses to take a trade in? She can’t go down the street and open her own used car lot. She can’t take it anyway and then run a competing used car lot alongside of Paul. She could probably send the car to auction though if Paul refused to take it. d. For numbers, see attached.

e. Evaluate:
▪ A viable transfer price is possible
▪ Nate should not have to do internal work for no profit. ▪ Nate should probably not make the same level of profit he does on work for customers ▪ Paul should be accountable for his errors

▪ If Paul has to value Janet’s trade ins, he should somehow be remunerated for his time and effort.

6) Recommendation
a. While there is some level of risk with respect to profit centres, they do help managers to focus on generating revenue and controlling costs. b. Perhaps there should be a portion of pay to these managers that is based on dealership profits, so they have reason to co-operate with one another to maximize overall profits instead of just own departmental gross margin. c. Nate should be paid for work he does for internal customers at a markup of less than 35% he gets for external work. d. Policies should be documented and well understood.