North Country Auto, Inc. Write-up

Background and Cost Accounting Environment

In 1989, North Country Auto, Inc. a franchised dealer and factory-authorized service center implemented a new control system. The company was divided into five decentralized profit centers---New Car Sales, Used Car Sales, Service, Parts and Body shop. The bonus of each department manager is based on the departmental gross profit. The analysis using the Porter’s Five Forces Model indicates that the average profitability of vehicle sales industry is low. There are more and more educated customers and increasing number of industry new entrants. Also the industry itself is characterized by high inventories and aggressive discounting.

The Major Crisis Facing the Company

Recently, one vehicle transaction heighted problems within the new structure and sparked frictions among different profit centers. Although each profit center should maximized its profits, they must not negatively affect other profit centers. Mangers of those profit centers disagreed on the current transfer price among departments and profit and cost allocations.

The analysis of exhibit 3 shows that the new car sales department generates the highest sales and gross profit. However, parts department has the highest profit before common expense. Generally speaking, The profit margin is highest in parts department with a profit margin of 12.56% and then followed by body department (profit margin 9.09%) and service department ( profit margin 7.44%). At the same time, the new and used car profit centers only make profit margins of .15% and .45% respectively.

Furthermore, current profit allocation results in unfair profit allocation among departments. From the recently car sale transaction we can see that if new car department allows higher trade-in price for used car than the car’s guidebook value, the cost for