The Conumdrum of Business

1. MISSION OF NORTH COUNTRY AUTO AND NEW CAR SALES DEPT.

The long term mission of our company is to maximize profit by increasing margins and volume of sales. Given the stiff competition in the industry, and a combination of high inventories and a more educated customer, our immediate objective is to sustain the market conditions and continue to be profitable and have positive cash flows.

The industry is attracting new market players, which makes it a perfect competition. This results in transferring price determination power to the market rather than the seller. The excess market supply in turn pushes down the prices in order to attain market equilibrium. Thus, the falling margins are beyond the control of the dealership, so we must make up for the lost profit by increasing the sales volume.

As the new car sales department, our mission broadly is to help the dealership, as a whole to achieve its mission by maximizing our departments’ contribution to the dealership’s earnings.

Our department caters to the customer’s changing tastes by sourcing for the popular car models that customers want to buy. We keep up with market trends and customer preferences with the purpose of satisfying the customer. Through customer retention and loyalty, we aim to secure future prospects of not just new car sales, but also other dependant departments such as service, parts and body.

Bearing in mind the market competition, our department is constantly trying to increase the new car sales volume. In order to attract customers, our department offers competitive trade-in allowance, leading to increased sales. This helps in generating new customers as well retaining the old ones. In addition, the department is also in charge of setting selling prices such that there is optimal profit for the firm. We strive to deliver customer oriented service and believe that high trade-in and sales volume will benefit the dealership in the long term.

Our department is also responsible for holding the optimum inventory mix among the three product lines. This is important because the supply of each product needs to match the market demand, so that an optimal quantity of inventory is held. By doing so, we ensure that excess working capital is not blocked in inventories while at the same time ensuring sufficient stock for retail.

Further, the compensation of the sales force, is entirely based on gross profits. This acts as an incentive towards both higher sales and higher margins, ultimately leading to higher earnings for the dealership.

Therefore, the bottom-line is that our department seeks to align ourselves with the mission of the dealership which is to sustain market changes, and remain profitable.

2. THE FEASIBILITY OF THE PROFIT CENTRE CONCEPT

A profit center is a responsibility center whereby its financial performance is measured in terms of profit. Profit is defined as the difference between the revenues and expenses.

The profit center concept improves the quality of decisions mangers make as they are closest to the point of decision. However, for business units to operate as successful profit centers, the managers in charged must possess the authority to influence revenues and costs which essentially translates into full control for profits.

In the case of North Country, there are constraints to the business units’ managers’ authority in various ways. These constraints impede the success of the business unit as a profit centre and hence make the profit centre concept less feasible for North Country.

2.1 Constraints on Business Unit Authority

Essentially, the primary constraint for North Country is that all business units are inter-dependent and hence must deal with one another. Owing to this, transfers of products and services between departments become costs for one and revenue for the other under the profit center concept. However, managers have little control over the costs transferred to their departments from other departments as they do not have a say in the prices charged by these departments. Consequently, managers are disgruntled because these uncontrollable costs affect their profits which are the basis for evaluation of their department’s performance that is closely linked to their incentive compensation package.

In this light, managers may not be motivated to undertake any activity that would undermine or have no positive impact on their profits. As a result, managers may try as far as possible to avoid the incurrence of transfer of products and services between departments so as to not impact their profits and incentive compensation package. Such actions may yield undesirable consequences for the company as a whole.

To better visualize the above mentioned reasons for the infeasibility of the profit center concept for North Country, it is essential to look further into each department.

New Car Sales Department

Firstly, the new car sales manager, Walker, is not in control of the transfer price of trade-in cars as they are determined using the wholesale guidebook. He is only in control of the trade-in allowances given to the new car customers when the latter trades in a car to get a better price for the new car. Essentially, the new car department is made to bear the loss when the transfer price is lower than the trade in allowance Walker sets, thus impacting the profit he is evaluated upon. As a result, Walker is discontented as he feels that he is not responsible for such losses and that these losses should be borne by the used car department. In essence, the problem lies with the fact that Walker and his department is evaluated based on a profit centre concept but is in effect unable to fully control the revenue and costs вЂ" i.e. to set a competitive trade-in allowance to improve the marketability of new cars and yet not incur