Lipman
By Kate Pedroso
Case 17-1: Delaney Motors
Understanding of the case
In order for Frank Delaney, owner and operator of Delaney Motors, to accurately determine the profitability of the body shop’s operations, an accurate assessment of his sales and costs has to be done.
As it stands, Delaney’s current system of determining semi variable and fixed costs can still be improved to better depict both the body shop’s own costs as well as its share in the entire company’s costs. Hiring a consultant to study how this may be done is a step in the right direction.
Among the consultant’s adjustments that I agree with include the inclusion of a properly allocated fraction of the cost of the owner’s salary to the body shop’s cost. I also agree with the consultant’s suggestion that a similarly recomputed fraction of the cost of the company’s legal and auditing services be taken into consideration as well in computing the body shop’s total costs.
Meanwhile, the re-allocation of the body shop’s fixed costs as a percentage of the body shop’s current fixed costs to the company’s entire fixed costs is also a sound recommendation.
Questions for the case
1. Why should the cost for “telephone and telegraph” for the body shop be recomputed based on the entire company’s telephone and telegraph costs if the exact cost of the body shop’s cost for the item can be determined anyway ($839)?
2. How was the 20% (as seen in Line 19) derived?
3. Is it correct to use the employee percentage (21.7) in allocating the semivariable cost?
4. Are the fixed costs not identifiable to each segment?
Recommendations
- Granted the body shop’s low profitability, Mr Delaney should consider leasing it out, but perhaps it could be done while maintaining a considerable “monitoring power” to ensure quality (e.g. He could stay on as a consultant of the new management)
- Should he decide to keep the body shop, Mr Delaney should be aware of what other dealerships’ body shops are doing and how much
Case 17-1: Delaney Motors
Understanding of the case
In order for Frank Delaney, owner and operator of Delaney Motors, to accurately determine the profitability of the body shop’s operations, an accurate assessment of his sales and costs has to be done.
As it stands, Delaney’s current system of determining semi variable and fixed costs can still be improved to better depict both the body shop’s own costs as well as its share in the entire company’s costs. Hiring a consultant to study how this may be done is a step in the right direction.
Among the consultant’s adjustments that I agree with include the inclusion of a properly allocated fraction of the cost of the owner’s salary to the body shop’s cost. I also agree with the consultant’s suggestion that a similarly recomputed fraction of the cost of the company’s legal and auditing services be taken into consideration as well in computing the body shop’s total costs.
Meanwhile, the re-allocation of the body shop’s fixed costs as a percentage of the body shop’s current fixed costs to the company’s entire fixed costs is also a sound recommendation.
Questions for the case
1. Why should the cost for “telephone and telegraph” for the body shop be recomputed based on the entire company’s telephone and telegraph costs if the exact cost of the body shop’s cost for the item can be determined anyway ($839)?
2. How was the 20% (as seen in Line 19) derived?
3. Is it correct to use the employee percentage (21.7) in allocating the semivariable cost?
4. Are the fixed costs not identifiable to each segment?
Recommendations
- Granted the body shop’s low profitability, Mr Delaney should consider leasing it out, but perhaps it could be done while maintaining a considerable “monitoring power” to ensure quality (e.g. He could stay on as a consultant of the new management)
- Should he decide to keep the body shop, Mr Delaney should be aware of what other dealerships’ body shops are doing and how much