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(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)
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 3,
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
Page 2 of 3,
(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
(4)
Ans
The problem lies with the used- car market. The external conditions were
not favourable & hence the dept. couldnt break even.
(5)
Ans
(6)
Ans
Page 3 of 3,