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Delaney Motors

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7/28/2019 Delaney Motors http://slidepdf.com/reader/full/delaney-motors 1/12 Delaney Motors Leo Almazora, Minch Cerrero, Cecille Grulla, Alria Ventanilla
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Page 1: Delaney Motors

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Delaney Motors

Leo Almazora, Minch Cerrero, Cecille Grulla, Alria Ventanilla

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Background

• Delaney Motors is a General Motors automobile dealership in

Ohio.

• Its operations include new-car sales, used-car sales, partssales, vehicle lease and rentals, vehicle service, and

automobile body repairing and repainting.

• The dealership was earning almost 5 percent on sales but thereported profit on the body shop operations seemed low to Mr.

Delaney.

• Mr. Delaney engaged a consultant to study the body shopoperation and make recommendations.

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• Most semi variable costs contain a significant portion of 

common costs.

• Each department benefits from these expenses and should beallocated a portion of these costs.

• Telephone and fixed costs could properly be allocated todepartments if the necessary documentation were available.

• The owner’s salary should be allocated accordingly. Industry

data show that owners’ salaries tend to vary with sales

volume.

• Units of production, machine-hours, material costs, sales

dollars, direct labor costs, and direct labor hours.

Consultant’s Report 

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• Direct labor hours will provide an acceptable cost allocation

base. In the interest of practicality and because other methodsclearly are unacceptable, allocating semi variable cost basedon direct labor-hours appears to be the most viable alternative.

• The financial statements list the number of direct and indirectemployees in each department but failed to disclose thenumber of departmental hours worked. It is assumed that alldirect employees work approximately the same number of hours per week.

• The number of direct laborers consequently becomes the cost 

allocation base for semivariable costs. 

Consultant’s Report 

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• CAR DEALERSHIP: A car dealership or vehicle local distribution is

a business that sells new or used cars at the retail level, based on adealership contract with an automaker or its sales subsidiary. Itemploys automobile salespeople to do the selling. It may alsoprovide maintenance services for cars, thus employing automotivetechnicians, stock and sell spare automobile parts, and

process warranty claims. (Wikipedia.com)

• BODY SHOP: A body shop is a facility for the repair and restoration

of automobiles. The staff is trained to deal specifically with damageto the body and frame of a car, such as that which might be incurredin a collision. Repairing damages to the body of a car or the framecan get quite complicated, and as a result a trip to the body shop israrely cheap. (wisegeek.com)

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The Problem

• Delaney Motors sees lower earnings in its body shop

operations. Frank Delaney, owner of the General Motors (GM)dealership business, hired a consultant to analyze the issuesfaced by this profit center. The consultant found out that somecosts are not properly allocated.

• The consultant then made a report regarding the Body Shopprofitability. He also provided alternative options such as tosell the shop, lease the shop and increase/decrease prices.Mr. Delaney considered these recommendations, however hewas more concerned of providing quality service than

profitability.

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Exhibit 1 Analysis of Body Shop ProfitabilityLine

1 Sales: body shop $306,652

2 Gross profit: body shop 91,107

3 Gross profit percentage (line 2 ÷ line 1) 29.7%

 Analysis of Semivariable Costs

4 Legal and auditing (body shop) 0

5 Owner’s salary (body shop) 0

6 Telephone and telegraph (body shop) 8397 Total body shop semivariable costs 839

8 Legal and auditing (company) 2,113

9 Owner’s salary (company) 21,600

10 Telephone and telegraph (company) 21,676

11 Total company semivariable cost 45,38912 Body shop percentage (line 7 ÷ line 11) 1.85%

13 Body shop employees as percent of total (5/23) 21.7%

14 Revised body shop semivariable costs (line 11 ÷ line 13) 9,867

15 Increase in body shop semivariable costs (line 14 – line 7) 9,028

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Exhibit 1 Analysis of Body Shop Profitability cont.

 Analysis of Fixed Cost

16 Body shop fixed cost, as now allocated $6,106

17 Total company fixed costs 28,81518 Body shop percentage (line 16 ÷ line 17) 21.19%

19 Revised body shop fixed costs (20% of line 17) 5,763

20 Decrease in body shop fixed cost (line 9 – line 16) (343)

Summary of Findings

21 Net increase in costs (line 15 – line 20) 8,685

22 Unrevised body shop profit 9,009

23 Revised body shop profit (line 22 – line 21) (324)

24 Unrevised profit to sales (line 22 ÷ line 1) 2.94%

25 Revised profit to sales (line 23 ÷ line 1) .1%

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Competitive Analysis

Delaney

Motors

No. 9 No. 6 No. 3

1 Sales, body shop $306,652 $363,662 $505,025 $681,201

3 Gross profit percent 29.7% 32.9% 30% 30.6%

14 Body shop, semivariable 9,867 9,547 13,913 18,177

19 Body shop, fixed 6,106 12,767 11,134 12,233

22 Body shop profit, unrevised 9,009 4,453 26,338 56,401

23 Body shop profit (loss) (324) (8,190) 19,386 36,650

24 Unrevised percent profit to sales 2.94% 1.22% 5.22% 8.28%

25 Revised percent profit to sales .1% (2.25)% 3.84% 5.38%

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Questions

• Question 1 Comment on the consultant’s adjustments made in

Exhibit 1. Do you agree with each of them? If not, can yousuggest better methods of making the adjustments for thestated purpose?

• Question 2 Assuming Mr. Delaney decides to keep the body

shop, and the consultant reports that it is feasible to raiseprices, should Mr. Delaney do so? If he does, what generalguide can you suggest as to how much prices should beincreased?

• Question 3 What action should Mr. Delaney take?

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 Answer to Question 1

Item Should be allocated Y/N? Agree to allocation method

 Y/N?

Body shop should pay itsproportionate share of legaland accounting fees.

YES YES. The method of allocation is based upondirect labor hours,assuming that eachemployee works the samenumber of hours per week.

Owner's salary should notbe charged to the bodyshop's operationsdepartment butshould be proportionately

allocated accordinglybased on sales volume of the whole company.

YES YES

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 Answer to Question 1

Item Should be allocated Y/N? Agree to allocation method Y/N?

Mr. Delaney have under allocatedoverhead to body shop manager,therefore, cost accounting systemfor this department has to bechanged.

YES NO. Since the body shop manager receives bonus based on a portionof his department's profit, unitoverhead cost for this segmentshould be higher.

Fixed costs for the body shop anddealership

YES YES. Just like the rest of GMdealers, fixed cost should be

allocated to the body shop basedon the ratio of body shop squarefootage to dealer's total squarefootage.

-If can be applied to DelaneyMotors, the Volkswagen approach

should also apply to the body shopdepartment. The company wouldthen put "weights" on fixed coststhen multiply this to the squarefootage used by the body shopdeparment.


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