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N Anthony Solution: Facts of the case: (a) North Country Auto has departments/profit centre : (i) New & (ii) Used Car Sales, (iii) Parts, (iv) Service & (v) Body. (b) New & Used cars dept.: Headed by managers. They dealt in cars of Ford, Saab & Volkswagen. (c) Parts dept.: Manager was responsible for tracking parts inventory for the three lines & minimizing both carrying cost & obsolescence. (d) Service dept.: The service dept. Occupied over half the building space & was most labour intensive. (e) Body Shop: They consisted of a manager, three technicians & a clerk.
Questions to be answered: (1) Using the data in the transaction, compute the profitability of this one transaction to the new, used, parts, and service dept. Assume a sales commission of $250 for the trade-in on a selling price of $5000. (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.) Ans Page 1 of 6,
O.H expenses has been converted into for the complete units. Thus for this one transaction the Net Profit will be $10,78,000/Assumption: Variable Cost for used cars is taken as 87.86% of Sales (as derived from the Financial statement-Exhibit 3). (2) How should the transfer-pricing system operate for each dept (market price, full retail, full cost, variable cost)? Ans The transfer-pricing should be at Full-cost for all the departments, but at the same time they should act as profit centre & compete with the market for quality & price of service. Page 2 of 6,
(3)
If it were found one week later that the trade-in could be wholesaled for only $3000, which manager should take the loss?
Ans
The loss should be booked on the used-car sales only. But the management should be conscious that this will be discouraging for the team, hence the incentives has to be designed in such a way, so as to strike a balance between the price of used car & no. of used cars, sold.
(4)
North country incurred a year-to-date loss of about $59000, before allocation of fixed costs on the wholesaling of used cars (see Note 2 in Exhibit 3). Wholesaling of used cars is theoretically supposed to be a break-even operation. Where do you think the problem lies?
Ans
The problem lies with the used- car market. The external conditions were not favourable & hence the dept. couldnt break even.
(5) Ans
Should profit centres be evaluated on gross profit or full cost profit? Profit centres has to be evaluated on Full-cost basis only, since financial viability of any profit centre is very important. They compete with the market and any subsidised evaluation, will lead to future accumulation of cost, leading to long-term losses.
(6) Ans
What advice do you have for the owners? My advise to owners to make all the transfer-pricing on the basis of totalcost and at the same time service departments like parts, service & body shop, should give their services to external customers at the market price.
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1. Computing the profitability of transaction described Sales Gross Profit Number of Units Sales Commision Overhead Cost Profit $5000 1014 1 250 665 $99
2. Menurut pendapat saya, akan lebih baik kalau transfer pricing dilakukan berdasar pada harga pasar (market price). Sesuai dengan market price bukan berarti sama dengan harga retail, melainkan sesuai dengan harga pasar ketika perusahaan luar melakukan kerjasama jangka panjang dengan North Country Auto. Bagaimanapun, perusahaan North Country Auto, Inc. menerapkan sistem bonus bagi manajer berdasarkan presentase dari gross profit departemen/unit bisnis. Tidak adil ketika departemen satu harus menyediakan resources bagi departemen yang lain dengan tidak mengambil margin sedikitpun (misalnya ketika menggunakan full cost dalamtransfer pricing), sehingga profitabilitas departemen yang bersangkutan akan menurun disebabkan oleh pricing menurut saya tidak menguntungkan tersebut. 3. Apabila satu minggu kemudian diketahui bahwa barang-barang trade in yang semula dapat dijual dengan harga grosir $3500 hanya dapat dijual secara grosir dengan harga $3000, maka yang seharusnya bertanggung jawab terhadap kerugian tersebut adalah manajer Used Car Departement. 4. Tahun lalu terjadi kerugian sebesar $59,000 pada Used Car Department. Mungkin, kerugian tersebut terjadi akibat keputusan untuk menunda penjualan mobil pada harga grosir (saat itu $3500) karena manajer ingin mendapatkan margin yang lebih besar pada harga $5000.
5. Menurut pendapat saya, evaluasi terhadap kinerja departemen atau unit bisnis perusahaan North Country Auto, Inc. lebih baik diukur berdasarkan gross profitdibandingkan dengan full cost profit. Alasannya adalah, karena dalam full cost profiti,di dalamnya telah termasuk biaya-biaya tetap non opersional maupun yang mungkin di luar kendali dari departemen yang bersangkutan, seperti biaya depresiasi, biaya iklan, dan komisi. 6. Dalam pertemuan antara pemilik, dalam hal ini adalah George Liddy, dengan para manajer departemen, diketahui bahwa tiap departemen telah menjadikan performance departemen sebagai hal yang lebih utama dibandingan dengan performance perusahaan sebagai satu kesatuan. Hal ini mungkin sebagai dampak dari sistem pemberian kompensasi yang didasarkan pada performance departemen yang mengakibatkan masalah berkaitan dengan goal congruence ini muncul. Solusi yang mesti dilakukan
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mungkin adalah dengan melakukan sedikit perubahan dalam sistem kompensasi, bahwa kompensasi atau insentive selain didasarkan pada gross profit departemen tetapi juga pada kesanggupan kerjasama antardepartemen (crossfunctional organization) yang menimbulkan keefisienan sumberdaya demi output yang lebih baik.
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