North Country Auto, Inc
NORTH COUNTRY AUTO, Inc.
Case Background
Each of the departments of North Country Auto, Inc. namely, the new cars sales and used cars sales, service, parts, body shop and oil change “operated as part of one business” before George Liddy bought into the dealership. The Department Managers were paid salaries and a year-end bonus. However, feeling that this system would not motivate employees, he devised a system wherein he could track effectively the departmental performance. For this, he developed a system for so that each department will be treated as decentralized profit centers. This new system requires that cost be broken down per department. Also, the bonuses per each department head will be based on departmental gross profits.
So far as the outcome of the new system is concerned, a recent new car purchase sparked friction and disagreements among division heads on the matter of setting of transfer prices and allocation of costs and profits. It was important that as one department aims to maximize profit, it does not negatively affect other departments. Issues that needed to be resolved include setting of transfer prices between departments, formalizing intercompany transactions, the divisional structure (use of profit or cost center), and the proper allocation of company profits among departments.
Problem
The different departments of North Country Auto, Inc. must choose between three pricing systems: base on market price, full retail better than others, and based on book value. Also, the company must decide whether they should continue treating each department independently in order to gain huge profits considering that the manager’s incentives are determined upon the department’s earnings.
Point of View In this case, we take the point of view of George Liddy, owner of North
Country Auto, Inc.
Analysis
In examining the issues faced by the company, the car purchase discussed in the interdepartmental meeting is used as illustration.
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Case Background
Each of the departments of North Country Auto, Inc. namely, the new cars sales and used cars sales, service, parts, body shop and oil change “operated as part of one business” before George Liddy bought into the dealership. The Department Managers were paid salaries and a year-end bonus. However, feeling that this system would not motivate employees, he devised a system wherein he could track effectively the departmental performance. For this, he developed a system for so that each department will be treated as decentralized profit centers. This new system requires that cost be broken down per department. Also, the bonuses per each department head will be based on departmental gross profits.
So far as the outcome of the new system is concerned, a recent new car purchase sparked friction and disagreements among division heads on the matter of setting of transfer prices and allocation of costs and profits. It was important that as one department aims to maximize profit, it does not negatively affect other departments. Issues that needed to be resolved include setting of transfer prices between departments, formalizing intercompany transactions, the divisional structure (use of profit or cost center), and the proper allocation of company profits among departments.
Problem
The different departments of North Country Auto, Inc. must choose between three pricing systems: base on market price, full retail better than others, and based on book value. Also, the company must decide whether they should continue treating each department independently in order to gain huge profits considering that the manager’s incentives are determined upon the department’s earnings.
Point of View In this case, we take the point of view of George Liddy, owner of North
Country Auto, Inc.
Analysis
In examining the issues faced by the company, the car purchase discussed in the interdepartmental meeting is used as illustration.
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