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North Country Auto Inc

In: Business and Management

Submitted By damayantikarunia
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Numerical:

(1) North Country Auto-Transfer Pricing problem, Page 181, Book: MCS by Vijay Govindarajan & Robert 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

[pic]

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.

(3) If it were found one week later that the trade-in could be wholesaled for only $3000, which

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