Clark Shuman, owner and general manager of an automobile dealership, was nearing retirement and wanted to begin relinquishing his personal control over the business’s operations. (See Shuman Automobiles, Inc. Exhibit 1 for current financial statements.) The reputation he had established in the community led him to believe that the recent growth in his business would continue. His long- standing policy of emphasizing new- car sales as the principal business of the dealership had paid off, in Shuman’s opinion. This, combined with close attention to customer relations so that a

Questions

1. Suppose the new- car deal is consummated, with the repaired used car being retailed for $ 7,100, the repairs costing Shuman $ 1,594. Assume that all sales personnel are on salary (no commissions) and that general overhead costs are fixed. What is the dealership incremental gross profit on the total transaction (i. e., new and repaired- used cars sold)? 2. Assume each department (new, used, service) is treated as a profit center, as described in the case. Also assume in a– c that it is known with certainty beforehand that the repairs will cost $ 1,594. a. In your opinion, at what value should this trade- in ( unrepaired) be transferred from the new- car department to the used- car department? Why?

b. In your opinion, how much should the service department be able to charge the used- car department for the repairs on this trade- in car? Why?

c. Given your responses to a and b, what will be each department’s incremental gross profit on this deal?

3. Is there a strategy in this instance that would give the dealership more profit than the one assumed above (i. e., repairing and retailing this trade- in used car)? Explain. In answering this question, assume the service department operates at capacity.

4. Do you feel the three- profit- center approach is appropriate for Shuman? If so, explain why, including an explanation of how this is better than other specific alternatives. If not, propose a better alternative and explain why it is better than three profit centers and any other alter-natives you have considered.