Shuman Automobiles, Inc.

UNIVERSITY OF THE PHILIPPINES

Institute of Management

College of Social Sciences

SHUMAN AUTOMOBILES, INC.

RESPONSIBILITY ACCOUNTING

TRANSFER PRICING

Submitted By:

Ame, Donna Mae B.

Dela Pena, Melissa S.

Dulad, Jhune E.

Submitted to:

Sir Jay Stephen Siy

12 October 2006

CASE 22 - 1 : SHUMAN AUTOMOBILES, INC.

Responsibility Accounting & Transfer Pricing

Facts of the Case:

1. Clark Shuman, owner and general manager, plans to retire and relinquished his control over the company

2. Business has been doing good with an emphasis of selling new cars as the principal business of the dealership

3. He created three independent departments, namely new car sales, used car sales, and service department.

4. Salary is dependent on each department's gross profit

5. Upon the take over of the managerial positions, Janet Moyer of the new car sales had a first challenge of making a sale through a costumer who wanted to trade his old car with a new car.

6. Moyer had to decide the amount she would offer the costumer for the trade in value of the old car.

7. The new car model has been in stock for some time and the model wasn't selling.

8. The list price of the new car is $14400.

List Price of New Car: $14400

Cost of the New Car: 12240

9. Paul Fiedler, the used car manager, estimated the reconditioning work to cost $840, and the car could be retailed at $7100 or wholesaled at $6100.

10. Blue Book price range of buying this model of car in good condition is from $5500 - $5800. Fiedler estimated he could sell the trade-in car at an auction as is at $5000.

11. If Moyer would sell the car without trade in, she will have to deduct about 8% from the list price, which makes the sales to $13,248.

12. Nate Bianci is charging the used car department for $2,000. Total cost of repair amounted to 1,594 and based on Blue book, charges for this kind of repair ranges from 1,960 - 2,040 and she has always aimed for the middle of the BB range.

Questions:

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:

SHUMAN AUTOMOBILES, INC

Income Statement

Sales of new cars $14,400

Cost of new car sales $12,240

New car gross profit $2,160

Sales of used car $7,100

Cost of used car $6,500

Service work on reconditioning $1,594

Used car gross profit $(994)

Dealership gross profit $1,166

2. Assume each department (new, used, service) is treated as a 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?

Wholesale after reconditioning 7,100

Market price of repairs -2,000

Trade-in value of unrepaired 5,100

Why 5,100 as the transfer price?

* Fiedler's feedback (used car manager) after examining the car together with Moyer (new car manager) and the customer.

* Car would require reconditioning work costing about $840.

* After which, the car would retail for about $7100, on wholesale basis it would be about $6100.

* "Blue Book" price range in buying used car in good condition is from $5500 - $5800.

* Fiedler estimated that he could get about $5000 for the car as is at the auction.

* Moyer's considerations:

* The new car had been in stock for some time and the model was not selling very well.

* Try to persuade the used-car manager to take over the car and accept the used-car manager's appraisal price

* She herself could sell the car through wholesale channels or at the auction.

* Balance the need to satisfy the customer (who had an inflated view of the worth of his old car) and move the new cars out on inventory.

* No trade-in, she would have to deduct 8% from the list price.

* Nate Bianci's charges in repairing the old car (deal has been consummated)

Transfer Price = Outlay Costs + Opportunity Costs

=