Shuman Automobiles, Inc.
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UNIVERSITY OF THE PHILIPPINES
Institute of Management
College of Social Sciences
SHUMAN AUTOMOBILES, INC.
RESPONSIBILITY ACCOUNTING
TRANSFER PRICING
Submitted By:
Ame, Donna Mae B.
Dela Pena, Melissa S.
Dulad, Jhune E.
Submitted to:
Sir Jay Stephen Siy
12 October 2006
CASE 22 – 1 : SHUMAN AUTOMOBILES, INC.
Responsibility Accounting & Transfer Pricing
Facts of the Case:
Clark Shuman, owner and general manager, plans to retire and relinquished his control over the company
Business has been doing good with an emphasis of selling new cars as the principal business of the dealership
He created three independent departments, namely new car sales, used car sales, and service department.
Salary is dependent on each department’s gross profit
Upon the take over of the managerial positions, Janet Moyer of the new car sales had a first challenge of making a sale through a costumer who wanted to trade his old car with a new car.
Moyer had to decide the amount she would offer the costumer for the trade in value of the old car.
The new car model has been in stock for some time and the model wasn’t selling.
The list price of the new car is $14400.
List Price of New Car:
$14400
Cost of the New Car:
12240
Paul Fiedler, the used car manager, estimated the reconditioning work to cost $840, and the car could be retailed at $7100 or wholesaled at $6100.
Blue Book price range of buying this model of car in good condition is from $5500 – $5800. Fiedler estimated he could sell the trade-in car at an auction as is at $5000.
If Moyer would sell the car without trade in, she will have to deduct about 8% from the list price, which makes the sales to $13,248.
Nate Bianci is charging the used car department for $2,000. Total cost of repair amounted to 1,594 and based on Blue book, charges for this kind of repair ranges from 1,960 – 2,040 and she has always aimed for the middle of the BB range.
Questions:
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)?
ANSWER:
SHUMAN AUTOMOBILES, INC
Income Statement
Sales of new cars
$14,400
Cost of new car sales
$12,240
New car gross profit
$2,160
Sales of used car
$7,100
Cost of used car
$6,500
Service work on reconditioning
$1,594
Used car gross profit
$(994)
Dealership gross profit
$1,166
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.
In your opinion, at what value should this trade-in (unrepaired) be transferred from the new-car department to the used-car department? Why?