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MA Assignment -4

Submitted by

Gouri Sankar Sahoo

M092-15

Section-B
Case 17-1

Delaney Motors

Solution:1.) I do not agree with the consultants exhibit. The following


Sticky issues are: Since the body shop manager could claim, that
because he exercises no control over the owners
salary,

this

cost

should

not

be

charged

to

his

department. This cost should have to be charged,


because his salary should be allocated over all the
departments.
Semi-variable costs can be allocated to operating
departments in several ways, thereby better appraising
departmental

and

managerial

performance.

The

allocation of some of the semi-variable costs should be


done differently. Instead of the costs being allocated
by percent of employee it should be allocated across
the departments. Therefore legal and auditing cost and
the owners salary should be allocated across the six
departments. As a result the total of $2113 legal and
auditing

costs

and

can

be

departments, which is $352.17.

divided

by

the

Then the $3,600 from Companys Owners salary


divided by the six departments to get the revised
body shops owners salary. Thus, the increase in body
shop semi-variable costs should be the total of $352.17
and $3600, which is $3,952.17.
2) If the consultant were to report that Mr. Delaney may
feasibly raise prices, I believe he should do so. Mr. Delaney
did not consider profitability to be the major consideration in
determining his course of action to improve the companys
financial situation. He was concerned more prominently with
providing high-quality work to his customers. If he were to
increase prices and sell some products at a loss, this will not
necessarily always have a negative impact and may actually
increase overall profit under certain situations, using a
contribution pricing approach. A major fact he must consider
with the option of raising prices is the pricing of his
competitors. After Analyzing the initial consultants data on
other dealerships, and believe he should raise prices enough
to increase his sales to possibly fall between the No. 6 and
No. 3 competitors. This analysis assumes that the demand
for the

body

shops products

and

services

remains constant. In order to gain a competitive advantage


along with raising his prices, it would be important to focus
on

improving the

quality

of

the

body

shop

and

overall service provided. Another suggestion would be that

could increase profitability is to consider ways to reduce


some of the body shops semi-variable costs.
3.) It is important for Mr. Delaney to take a course of action
that he is comfortable with. It is important to Mr. Delaney
that his dealership provide high-quality body shop work to
its customers and that if he leased the dealership it might
provide below-standard service. Therefore, it is not a good
option. Mr. Delaney should keep his dealership, but he needs
to implement a system that provides a better analysis of the
costs

and

allocates

them

more

accurately

to

each

department. Once he has done this, he should have a better


understanding of his own costs and can then look at the
competitors prices to make a more informed decision and
identify areas where he could potentially cut costs. After he
has this more reliable analysis he should raise prices if it is
feasible to increase his profit and remain competitive as
well.