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NORTH COUNTRY AUTO, INC.
1. Executive Summary
North Country Auto, Inc. was restructured by George Liddy so that each department will operate as an independent profit center. However, a recent new car purchase sparked friction and disagreements among division heads on setting of transfer prices and allocation of costs and profits. It was important that as one department aims to maximize profit, it does not negatively affect other departments. Issues that needed to be resolved include setting of transfer prices between departments, formalizing intercompany transactions, the divisional structure (use of profit or cost center), and the proper allocation of company profits among departments. After doing the analysis, it was decided that transfer price should be set at market price for New to Used Car department and Service to other departments, where as full cost plus mark-up to be used from Parts and Body Shop to other departments. Furthermore, it was determined that a better structure for the company would be for the New, Used, and Service departments to remain as profit centers, while the Parts and Body Shop department be changed to cost centers because the division managers did not have direct or influential control on the division's profit. The division managers' bonus scheme should also be revised so they can be measured in terms of variables which they have control over. For a profit center to be efficient and effective, it must be able to work autonomously without too much top level intervention.
2. Case Context
In 1988, George Liddy became part owner of North Country Auto, Inc. (NCAI) where all departments operated as part of one ...