Shuman Group 1
Transcript of Shuman Group 1
Accounting Case 22-2Shuman Automobiles, Inc.
Group Members
• Shannon Barbour
• Jillian Kavanagh
• Jean Manning
• Steven Penney
Case Facts
• Shuman Automobiles, Inc– Clark Shuman
• Owner and GM of an automobile dealership• Nearing retirement• In process of withdrawing from day-to-day
activities
Case Facts
• Shuman Automobiles, Inc– Dealership is divided into 3 departments
– Each department has its own manager• New Car department• Used Car department• Service department
– Each department is to be run as an independent business (a profit center)
Case Facts
• Manager’s remuneration is based on a straight percentage of their department’s gross profits
• Each department is concerned with maximizing its own profits
• This has caused disputes between the three profit centers
New Car Purchase Transaction
• Customer traded in his old car (which required repairs) in return for a reduced price on the new car
• The transaction involves all 3 departments
• The departments disagree over the appropriate trade-in price
Sample Transaction
Buying a new car with a trade-in
New Car List Price $14 400
(Cost of Goods Sold – New Car) (12 240)
Profit on Sale of Car 2 160
Trade-in Retail Price 7 100
(Cost of Trade-in) (6 500)
(Cost of Repairs) (1 594)
Total Incremental Gross Profit $1 166
Profit Center Transactions
• Assumptions– Each department is operating as a profit
center
– It is known with certainty beforehand that the repairs to the trade-in will cost $1 594
The Correct Transfer Value
• The new car department will have to transfer the trade-in to the used car department at a cost of $5 800 less the cost of repairs
• The new car department paid $6,500 on the trade-in, resulting in a loss for the department
The Correct Transfer Value
• It states in the case that the used car department is not obligated to take over the car
• The car will have to be transferred at a cost that the used car manager is willing to pay
• The “Blue Book” gave a cash buying range of the trade-in model of $5,200 - $5,800
The Correct Transfer Value
• Since the customer was a difficult one, and the new car sales manager had to allow an increased amount to complete the sale, the car should be transferred at $5800
• The trade-in has not been repaired therefore, this cost should be deducted from the transfer cost
The Appropriate Repair Charge
• It should be able to charge the used car department the price it charges outside customers
• If service is required to repair the trade-in & other inside repair work at cost this department’s opportunity for profit is decreased
• It would be more profitable for the service department to only repair outside cars
• The service department charged an outside customer $2,042 for similar repairs
• The used car department should also be charged this price
The Appropriate Repair Charge
Incremental Gross Profits
• Service Department
Sale of Repairs $2 042
(Cost of Repairs) (1 594)
Incremental Gross Profit $448
• Used Car Department– Transfer Price of Trade-In
Blue Book Price $5 800
(Price of Repairs) (2 042)
Transfer Price of Trade-In $3 758
Incremental Gross Profits
Incremental Gross Profits
• Used Car Department– Incremental Gross Profit
Trade-in Retail Price $7 100
(Transfer Price) (3 758)
(Price of Repairs) (2 042)
Incremental Gross Profits $1 300
Incremental Gross Profits
• New Car Department
New Car List Price $14 400
(Cost of Goods Sold – New Car) (12 240)
(Cost of Trade-in) (6 500)
Transfer Price 3 758
Incremental Gross Profits ($582)
Total Gross Profit for Shuman
• Total of 3 Departments:
New Car Dept. ($582)
Used Car Dept. $1 300
Service Dept. 448
Incremental Gross Profits $1 166
If Car Is Repaired and Sold…
New Car List Price $ 14 400.00
Cost of Goods Sold – New Car (12 240.00)
Cost of Trade-In (6 500.00)
Cost of Repairs (1 594.00)
Retail Price for Used Car 7 100.00
Gross Profit 1 166.00
A Higher-profit Alternative?
• Possibility: Sell the used car, “as is”, at the regional used car auction.
• Assumption: The service department is operating at full capacity.
• Repair time for the used car would reduce the profit realized from dealing with other customers.
If Used Car Is Auctioned “As Is”
New Car List Price $14 400.00
Cost of Goods Sold – New Car (12 240.00)
Cost of Trade-In (6 500.00)
Used-Car Price obtained at Auction 5 000.00
Repairs Charged to Other Customer 2 042.00
Cost of Repairs for Other Customer (1 594.00)
Gross Profit 1 108.00
The Result
Gross Profit realized when used car is repaired and sold retail.
$ 1 166.00
Gross Profit realized when used car is sold at the auction.
1 108.00
Difference $ 58.00
Results
• More profit will be realized if used car is repaired and sold.
• Points to consider: – minimal trade-off will not always exist in such
situations (with service department at capacity). – a more “reasonable” amount for the trade-in would
cause results to differ. – will Shuman Automobiles, Inc. be able to “move” the
car as quickly? What are the costs of having the used car on the lot?
Profit-centers at Shuman
• Is a three-profit-center approach appropriate? – No, we do not feel that the three-profit-center
approach is appropriate for Shuman to be using.
– This approach is not appropriate because:• All three departments are highly interconnected.• Department managers do not influence both
revenues and costs.
Alternatives to Profit Centers
• Operate the new car department and the used car department as profit centers, but not the service department
– This alternative is not viable because of interconnectivity of all three departments
Alternatives to Profit Centers
• Operate the departments as revenue centers.– Not viable because doesn’t fit the criteria
(Departments not responsible for selling expenses).
• Operate the departments as expense centers.– Not viable, doesn’t fit criteria.
Alternatives to Profit Centers
• Operate the departments as investment centers.– Not viable because the departments not
responsible for the use of both assets and profits.
• Operate in the same manner as before the introduction of profit centers.
Our Recommendation
• We recommend that the company return to operating the way they were before the introduction of profit centers.
• This is the best alternative because of the interconnectivity of the departments and the company was operating profitable before the changes were made.
Questions