1. Management Control System Nirbhay Patel Pooja Gala Pratik Jain Pushkar Kashyap Rohan Dharamshi Salim Hajiani

2. North country Auto New car department Used car department PartsServiceBody shop Organization structure of NCA

3.  NCA was a franchised dealer & service center  Mr. Liddy bought a stake in NCA  Mr. Liddy ( New & used car sales)  Mr. Jones (parts, service and body shop)  Mr. Liddy not satisfied with appraisal system  He wanted every center to be a profit center and act as independent business units Overview - Case Study

4.  Every center was concerned with increasing their profit  New car dept. gave excess trade-in allowance to generate sales  Old car dept. referred to wholesale book value to determine trade-in allowance  No one was ready to book the loss  Parts and services were supplied at retail price in- house Friction between the departments

5. Figures in dollar NewUsedPartsServices Revenue128505000167.87134.28 COGS114203750167.87134.28 Variable ExpensesDirect selling202.5364.1na Supplies46.4146.150.291.93 Policy Work61.1830.7601.43 InventoryNIL302.15na CONTRIBUTION MARGIN 1119.88806.84-0.29-3.36 Fixed Expenses in Profit Center Rent187.7656.410.226.84 Depreciation6.322.560.041.53 DIRECT PROFIT 925.8747.87-0.55-11.73 Controllable Corporate chargesDept. Advst191.9876.920.071.93 Indirect Labor341.77189.743.8824.19 Interest on new Inventory70.8216.766.73213.4 Insurance22.545.332.144.26 Owner's Salary41.859.913.987.92 CONTROLLABLE PROFIT 256.84449.21-17.352-63.43 Other Corporate AllocationOther Interest13.523.21.292.56 Income before tax243.32446.01-18.642-65.99 Q1. Profitability of one transaction

6.  Transfer pricing should be chosen so that each division while maximizing their own profit also ensures that organizational profit is also maximized (goal congruence)  Its an interdepartmental transfer so full cost does not inflate profit  It keeps the different centers responsible for their complete expenses  It helps in reducing the conflict of interest between the departments Q2. How should the transfer pricing system operate for each department?

7.  The Used Car Dept. should take the loss  The trade-in is happening at book value  The sale of the used car should ideally be conducted before the price goes down  Hence the used car dept. should take the loss Q3. If it were found one week later that the trade-in could be wholesaled for only $3000, which manager should take the loss?

8. Q4. north Country incurred a year to date loss of about $59000 before allocation of fixed cost on the wholesaling of used cars. wholesaling of used cars is theoretically supposed to be a break-even operation. Where do you think the problem lies?

9.  Sale does not happen at the price at which it is booked  The price of the used car is on the basis of the wholesale guide-book value  Actual value varies as much as 25% of the book value

10.  Profit Centers should be evaluated on Full Cost Profit  Gross profit figures use only direct expenses  Full cost figures include indirect expenses which can be monitored and controlled by the profit center Q5. Should profit centers be evaluated on gross profit or “full cost” profit?

11.  Have 3 profit centers instead of 5 viz New and used car Dept, Parts and Services and Body Shop  The transfer pricing should be based on Full Cost and not on Retail price  Bonus should be calculated on the Full cost Profit and not gross profit Q6. What advice do you have for the owners?