Manager: Automobiles and Service Department

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| |Shuman Automobiles, Inc. | |
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Question #1 - 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
|Sales Revenue | |
| Sales of new car |$14,400 |
| Sales of repaired-used car |$7,100 |
| Total |$21,500 |
|Cost of Sales | |
| Cost of new car |$12,240 |
| Trade in value on used car |$6,500 |
| Cost of reconditioning |$1,594 |
| Total |$20,334 |
|Gross Profit |$1,166 |

Question #2 - Assume each department (new, used, service) is treated as 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. a. In your opinion, at what value should this trade-in (unrepaired) be transferred from the new-car department to the used-car department? Why? b. In your opinion, how much should the service department be able to charge the used-car department for the repairs on this trade-in car?