Case 17-1 Delaney Motors

1. Comment on the consultant's adjustments made in Exhibit 1. Do you agree with each of them? If not, can you suggest better methods of making the adjustments for the stated purpose? I cannot agree the adjustments of the consultant completely. Firstly, I think his adjustment on the allocation of owners salary is not completely reasonable. I agree with his statement that Mr. Frank has done a lot of work on his body shop; his administration should be a part of the cost, but the percentage of it cannot just simply depend on the percentage of the body shop employees as percent of total. I cant see the causal relationship between them. Secondly, I think the cost of telephone and telegraph should not be allocated by the number of workers. He should considerate the different departments use that in different proportions and contribution of sales. So does the cost of legal and auditing. So, the adjustments of the consultant are not accurate enough in the part of variable costs, because he failed to tie in which costs were actually associated to the body shop and which ones should be allocated to the body shop. He should analysis every cost and associate them with their contribution of the revenue from the body shop. 2. Assuming Mr. Delaney decides to keep the body shop, and the consultant reports that it is feasible to raise prices, should Mr. Delaney do so? If he does, what general guide can you suggest as to how much prices should be increased? I think simply raising prices may not solve the problem. The reason that Mr. Delaney want to keep the body shop is not about the profitability. He believed that a good dealership had an obligation to provide high-quality body shop work to its customers, which means the pricing of the services of the body shop, can be considered as a contribution pricing. Even though these services and products are sold at a loss, under certain conditions they may increase the companys total profit. In this case, a decent body shop or a cost-effective body shop may help Mr. Delaney to maintain his old customers and even attract more new customers.

What I suggest Mr. Delaney about the pricing is just keep in line with the rest of his competitors. 3. What action should Mr. Delaney take? Because the analysis provided by Mr. Delaneys consultant is not entirely accurate. I recommend him to analysis his cost of the body shop again, and figure out the accurately cost of the body shop. Then, he can make appropriate decision and find out where to decrease the cost.