To enhance the success of Body Shop, it is recommended that they increase their marketing efforts and improve their cost accounting system. The cost accounting system is crucial for accumulating costs related to service provision or product manufacturing. It allows management to determine appropriate service costs, set product prices, and identify opportunities for cost reduction and production efficiency.
Delaney Motors lacked allocation base, resulting in wastage of its contribution margin due to large operating expenses. However, Body Shop's exhibit illustrates that its contribution margin or gross profit is comparable to other dealers in the same marketing area. By implementing suggested allocation methods, Body Shop can better plan and direct operations. When scrutinizing operations' efficiency, it appears the line has exceeded its managing abilities. Despite generating s
...ales of 306,652.0, its gross profit percentage only reached 29.70%, while operating expenses nearly equaled gross profit percentage to sales at 29.40% (refer to Exhibit 2). Other dealers have achieved similar gross profits without any marketing efforts by Body Shop.Immediate action is necessary to increase the service revenues of Delaney Motors' body shop due to fierce competition for gross profit among dealers. Discontinuing the body shop line would result in a drop of $15,950.13 in total operating income. The differential income compared to the net income of the line is 18 times larger. It could also lead to a decrease in sales of more profitable products or lines offered to customers who were attracted to the now-discontinued line. Thus, discontinuation is not recommended despite the distortion of Body Shop's operations due to the previous allocation base of the company. Instead, a more appropriate base should be
applied to correct misleading financial facts and establish proper documentation or trail for cost allocation in the future. Since Delaney Motors and Body Shop share common characteristics of rendering services to individual customers, overlap and cost assumption by one department in favor of another is likely without proper documentation.
As a strategic move, it would be beneficial to task line managers with creating cost reports for production or services. This will aid in managing and enhancing operations by providing detailed cost breakdowns that allow top management to identify areas of concern and potential areas of growth. Focusing marketing efforts on the Body Shop is advisable as it is just as competitive as other Ohio dealers. By trimming operating expenses, unnecessary spending will be eliminated and the line will have a greater budget for promotional activities.
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