Auto Dealer Cost Accounting Comment Case Study

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The consultant allocates fixed costs based on the ratio of departmental square footage to total dealer square footage, adjusted by a weighting factor. The weighting factor takes into account various machinery, equipment, furniture, and fixtures located throughout the dealership. The consultant used a factor of 1, which is an industry standard.

The consultant acknowledges that the departments have very different functions, costs and profits, however his attempt to allocate costs does not adequately take into consideration their differences. I believe that these results are questionable due to the lack of specificity in the financial statements. Given that the revised profitability number will be used to determine if jobs will be eliminated and is also used to determine the body shop manager's bonus, I recommend that if it is available that, Mr. Delaney provides more detailed information on the labor-hours or creates a better measurement system for both fixed and semi-variable costs and then has the consultant repeat the analysis in six months.

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2) Assuming Mr. Delaney decides to keep the body shop and the consultant reports that it is feasible to raise prices, should Mr. Delaney do so? If he does, what general guide can you suggest as to how much prices should be increased?

Based on the consultant's analysis of other dealerships with body shops, Mr. Delaney should increase prices 100%. If Mr. Delaney doubles his prices, he will position his services at a price point between dealers No. 6 and No. 3, allowing him to stay competitive and achieve a profit to sales ratio between 3.84% and 5.38%.

3) What action should Mr. Delaney take?

Mr. Delaney should repeat the analysis using existing data at a deeper level of detail or create a new measurement process, which will provide the right level of data and….....

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