Magnus Holmstrm Linkoping University

Case 5-2 North Country Auto

NCA is a small rural car dealer with a relatively high cost level compared to the volume competitors in the big cities. One important question is if the company can benefit and afford a divisional from with profit centers. There are four main problems in this case, as I see it. 1. How many profit centers, if any? 2. How should the income statements be structured? 3. What transfer prices should be used? 4. How should bonus system be set? Normally dealers in this size are organized as profit centers, at least in Sweden. How many PC depends on the strategy and the internal dependencies. Important product- market segments should be PCs and departments with mutual dependencies should be organized together. The NCA should implement a differentiation strategy with customer satisfaction based on excellent service and strong relationships. If the car is new or used is not important, the important thing is to sell a good car. There are also mutual dependencies between used and new cars. Used and new car should be one profit center. There are a lot of internal dependencies between service and parts. They also have the same customers and the same strategic goal; to give excellent service to the customers, one time and with good quality. Service and parts should be one profit center. The body shop has a specific product and market segment, crashed car and insurance companies as the main customer. This department also has a big potential market outside the traditional NCA customers Body shop should be one profit center. The income statement for each PC could be structured in the following way
Revenues (external and internal) Variable expenses (direct cost for salaries and cars sold) Contribution margin (divided to different products such as SAAB, WV, Ford and used) Fixed expenses (controllable overhead cost) Controllable income (bonus base) Allocated expenses (from HQ) Div net profit before tax (effectiveness measure)

The TP should be cost based (Full cost included capital charge) and communicated in a well known and accepted TP list.