EXECUTIVE SUMMARY
This case is about how a company should allocate costs. Mr. Delaney is the owner of an automobile dealership that is profitable but not profitable in the area of the body shop department.. The predicament that he faces is that he needs to figure out how to allocate the costs among his different profit centers. One of the things that Mr. Delaney did in trying to assist himself was to hire a consultant. The consultant was one that is very competent in analyzing the issues of cost, both fixed, variable and semivariable. He then tried to relate his knowledge to help Mr. Delaney in his dilemma. Mr. Delaney decided that he wants to provide a high quality product to his customers. He wanted the consultant to further assist him in his analysis by finding out more about his competitors and the prices they charged. The consultant made suggestions that included leasing the body shop to another party, liquidating it, and increasing prices but Mr. Delaney decided that profit is not his main focus at this time.
REVIEW OF FACTS
This case is about an auto dealership owned by Frank Delaney. This auto dealership included all the operations and “profit centers” of a normal GM dealership. They sold new and used cars, had a parts and service department, and was also involved in rental and leased vehicles.
Mr. Delaney hired a consultant who would help him analyze all his different costs associated with the struggling body division of the dealership. The consultant did many reports about the fixed, variable, and semivariable costs. In semivariable costs, what he did was make the adjustment for the amount of employees working at the body shop to the number working at the entire operation. He tried to find out if the body shop was profitable compared to other dealerships and he found out that it wasn’t. The other issues that came up was how the owners salary should be allocated as a cost. Should it be spread out through all the departments equally or not.
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The consultant did many different study’s of the company and how it compares to others in terms of profit, price and costs and made his recommendations of either selling that part of the business or leasing it to another company or changing the prices charged. Mr. Delaney had to take into consideration all of these things and decided it was best to remain a very service oriented operation and to continue this service at good prices.
ISSUES
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?
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?
3.What action should Mr. Delaney take?
ANALYSIS
I don’t think the semi variable costs are accurate because of the way he calculated them. For telephone and telegraph he didn’t take into consideration the fact that the different departments use that in different proportions. Plus the fact that it is based on the number of workers in the body shop compared to that of the entire operation makes the analysis a bit obscure.
I feel that instead, what he should have done was analyze each profit center as a separate entity in relations to the costs they incur that way each one would be clear and reasonable.
As far as legal analysis, I don’t think it is right because he didn’t take into account the costs as it relates to the body shop.
As far as the owners salary issue, the case didn’t say how the other company’s work that out. I think that the way he did it is good because he brought out the assumption that Mr. Delaney spent a lot of his time on the body shop and was justified in taking a portion of the cost for himself.
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I think that the way the consultant did his analysis was somewhat in accurate 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.
2. Mr. Delaney would be doing himself a disservice if his prices were not in line with the rest of his competitors. Unless he could retain a profit margin equal to his competitors with lower prices I think he should raise them to industry standard.
3. The action Mr. Delaney should take should be the one that is most in line with his goals, mission and vision for the company. It seems as if he wants to retain the level of service for the buck he is giving his customers so I think he feels comfortable doing this and that is what he should do. I also think he should increase prices slowly if it is warranted by the industry and at the same time try to reduce the costs associated with the body shop to increase profit margin for that department.
Conclusions/Recommendations
This case brought to light the importance of allocating the costs of a company to the correct departments and the benefits of doing so in the analysis of each department.
The consultant seemed to make a recommendation based upon inaccurate cost allocations and a lack of analysis of the prices of competitors.
What Mr. Delaney should do is to get an accurate system in which he could allocate costs accurately to the proper department. Do the analysis which is needed based on accurate cost allocation and then make his decision after he gets a report on actual prices in the industry for the body shop. If his prices are low but he is retaining his profit margin I would keep it low but if he needs a price increase to stay in line with competitors in the way of profit margin I think he should raise the prices of his service. He doesn’t want to get rid or lease that portion of his business so I don’t think he should. He will be able to further service his customers if he keeps the body shop but finds a way to make it more profitable by either raising prices or doing a more accurate analysis of costs so he could see where to cut costs.
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