Beckett Automotive Group

Beckett is a large car dealership that sells several automobile manufacturers' new cars (Toyota. Ford. Lexus, and Subaru). Beckett also consists of a Pre-owned Cars Department and a large service department. Beckett is organized into three profit centers: New Cars, Pre-owned Cars, and Service. Each profit center has a manager who is paid a fixed salary plus a bonus based on the net income generated in his or her profit center.

When customers buy new cars, they first negotiate a price with a new car salesperson. Once they have agreed on a price for the new car, if the customer has a used car to trade in, the Pre-owned Cars Department manager gives the customer a price for the trade in. If the customer agrees with the trade-in price offered by Pre-owned Cars, the customer pays the difference between the price of the new car and the trade-in price.

Suppose a customer buys a new car for $47,000 that has a dealer cost of $46,200. The same customer receives and accepts $11,000 for the trade-in of her used car and pays the balance of $36,000 in cash (ignoring taxes and license). In this case. New Cars shows a profit of $800 (before any commission to the salesperson). If the customer does not accept the trade-in value, she does not purchase the new car from Beckett.

Once the deal is struck, the trade-in is then either sold by Pre-owned Cars to another customer at retail or is taken to auction where it is sold at wholesale. Continuing the preceding example, suppose the customer accepts $11,000 as the trade-in for her used car. The Pre-owned Cars Department can sell it on its used car lot forPage 203

$15,000 at retail or sell it at auction for $12,000. If the trade-in is sold for $15,000. Pre-owned Cars would have a profit of $4,000 ($15,000 $11,000). If it is sold at auction. Pre-owned Cars reports a profit of $1,000 ($12,000 $11,000).

Required:

a.Describe some of the synergies that exist within Beckett. In other words, why does Beckett consist of three departments (New Cars. Pre-owned Cars, and Service) as opposed to just selling new cars, or just selling used cars, or just providing service?

b.What potential conflicts of interest exist between the New Cars and Pre-owned Cars department managers? For example, describe how in pursuing their own self-interest, the manager of New Cars or Pre-owned Cars will behave in a way that harms the other manager.

c.Suggest two alternative mechanisms to reduce the conflicts of interest you described in part(b).