Infantine Saab is a car dealership that has been in business for 40 years at the same 20-acre location selling and new and "pre-owned" (used) Saabs. Two years ago, Infantine Saab replaced irs aging showroom and service center with a new. state-of-the-art facility When Ms Infantino's father started the dealership, the business was on the outskirts of town. Now with the growth of the city. the dealership is located on a busy commercial street surrounded by other dealerships, restaurants. and shopping centers. The market for new cars is Very competitive because many buyers shop on the Internet before visiting new car dealers Once customers decide to purchase a new car from a dealer, they usually trade in their used car to avoid the hassle of selling the car themselves Therefore, these new car buyers are willing to accept lower prices for car dealers for their trade-ins Also, pre-owned cars have higher margins because there is less competition for used cars, as each car differs in terms of mileage. condition, and options Suppose a new car is sold for $45,000 ($500 over dealer cost) and the buyer receives a trade-in allowance on his old car of $8,000 and pays the difference in cash. That used car is then sold for $10, 800. The dealer nukes $500 on the new car and $2.800 on the used car Infantino also offers parts and service for the new and pre-owned cars it sells. lnfantino Saab is organized into three departments New Cars. Pre-owned Cars, and Service. All three share the same building and lot where the new and used can are displayed. Ms. Infantine compensates her three department beads based on residual income. After careful analysis by her financial manager, they determine that all three departments should be charged for the capital invested in their departments at 16 percent. The new building cost $12 million and the land cost $900,000 The following table summarizes the land and building utilization by each department, each department's net income, and other net assets invested in each department: For example, the new car department occupies 50 percent of the land and 30 percent of the building It had net income of $600,000 and other net assets of $2.500.000 Other net assets consist of all inventories and receivables (net of external financing) invested in the department For example, the new car deportment has a substantial inventory of new cars But this new car inventory is mostly financed by short-term bank loans. The new car department pay interest on these loans, which is deducted (and therefore included) in the new car department's net income of $600,000. Each department's income consists of all revenues and expenses directly traceable to that department, including interest on any debt used to finance the department's inventory. Income taxes are not included in the department's net income reported in the table Infantine Saab uses the trade-in allowance of used cars taken in trade as the transfer price of used cars in calculating the net incomes of the new and pre-owned car departments. Calculate the residual income of each of the three divisions of Infantine Saab. Discuss the relative profitability of the three departments. Which is making the roost money and which is the Least amount of money? Discuss whether the residual incomes of the three departments capture the true profitability of each department. What problems do)you sec in the way MS Infantine is evaluating the performance of the three department managers and of Infantine Saab as a whole
