Infantino Saab is a car dealership that has been in business for 40 years at the same 2}-acre location selling and servicing new zurd "pre-owned" (used) Saabs. Two years ago, Infantino Saab replaced its aging showroorn and serice center with a new, stateof-the-art facility. When Ms. Infartino's father stafted the dealership, the business was on the outskirls of town. Now with the gowth of the city, the dealership is located on a busy commercial street surrounded by other dealerships, restaurants, and shopping centers. The marke{ 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 optrons. Suppose a new car is sold fbr $45,000 ($500 over dealer cost) and the buyer receives a trade-in allowance ou his old car of $8,000 and pays the difference in cash. That used car is then sold for $10,800. The dealer rukes $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. Infantino Saab is organizd into three departmentsr New Cars, Preow:red Cars, and Service. All three share the same building and lot where the new and used cars are displayed. Ms. Infaltino compensates her three department heads based on residual income. After carefu1 analysis by her financial manager, they determine that all three departnents should be charged for the capital invested in theh deparments at l6 percent, The new building cost $12 million and the land cost $900,000. The following table summarizes the land and building utilization by each deparhnent, each departurent's net income, and other net assets investod in each deparhnent: Percent of["and Percent of Building Deparhnent Income Other Net Assets New Cars Pre-owned Cars 500/o 40% 30% 10% s600,000 $1,725,000 $2,500,000 $6,700,000 Parts & Seruice 10% 60% $i,813,000 $ 1,300,000 Total 100% 100% $ 4,138,000 $ 10,500,000 For example, the new car deparhent 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 extemal financing) invested in the department. For example, the new car department has a substantial inventory of new cars. But this new car inventory is mostly financed by short-term bank loaas. The new car departmsnt pay interest on these loans, which is deducted (and thercfore included) in the new car department's net income of $600,000. Each deparftnent's incone consists of all revenues ald expenses directly traceable to that department, including interest on any debt used to furance the deparfnent's inventory. lnoome taxes are not included in the departmel)t's net income reported in the table. Infantino Saab uses the trade-in allowance of used cars taken in trade as the transfer price of used cars in calculating the net incomes oftle new and pre-owned car departrnents, Required: a. Calcr:iate the residual rncome of each of the three divisions of Infantino Saab. b. Discuss the relative profitability of the three departments, Which is making the most money and which is rnaking the le ast amounl of money? c, Disouss whether the residual incomes of the three deparbnents capture the true profitability of each department. What problems do you see in the way Ms, lnfantino is evaluating the performance of the three dqlartrnent managers and of Infantino Saab as a whole?