ACCOUNTING CASE STUDY

Berlin Toyotat

(Ted Berlin], the co-owner and general manager of Berlin Toyota in "Driedwood," Indiana, was in a pensive mood. He was bothered by what he had heard; disagreements between the manager of the used car department, one of the dealer­ ship's star salesperson and the manager of the service de­ partment In a family-run dealership the last thing he and his wife, [Penny], the business manager, wanted was interde­ partmental strife. He was wondering if they had done the right thing when they installed the profit center concept in the dealership.

Ted had come into the dealership, located on US 31 south of Indianapolis, in midmorning as usual to make his rounds. He greeted employees on the sales floor and in the service and parts departments and then walked around the facilities, straightening chairs, discarding empty coffee cups and making sure the facilities were neat and looked good. He felt proud of the dealership and believed he was a hands-on owner/manager in the best sense of the word. He and his wife had started their dealership with a $150,000 loan from Ted's former boss and a determination to make it work. Working six long days a week the couple had turned their dealership into one of the most successful enterprises in the region. In addition to the 92 employees whose liveli­ hood depended on the automobile dealership, the Berlins also employed eight more people in their credit life insur­ ance business. Life with their business enterprises was not easy. But the couple wanted to work for themselves and en­ joyed the environment of automobiles even though they had substantial capital at risk tied up in the dealership facilities and the inventory of used cars that they had traded for or bought with cash.

THE DEALERSHIP

The dealership was a full-service facility but did not have a body shop. Any repairs involving body work were sent to a nearby body shop or to another facility according to the cus­ tomer's preference and insurance rompany arrangements. The dealership was housed in a very functional facility but it could not be called a "state-of-the-art" building. Compared to its neighborhood competitors that were housed in ultra-

BERLIN TOY OT A / 19

Pekin Ogan Indiana University

modem facilities, Berlin Toyota facilities could even be de­ scribed as quaint. The sales floor was crammed with new cars. In one comer a machine was constantly popping fresh popcorn. Next to the popcorn machine an old-style juke box was programmed to play Fifties and Sixties records. The Ber­ lins felt that the relatively low overhead of their facilities was reflected in lower labor charges for service work and this out­ weighed any disadvantage associated with the homey-looking sales floor. Mr. Berlin stated that their monthly debt service payments were much less than those of their competitors. This freed working capital that could be used more produc­ tively someplace else in the dealership. Their customers seemed to agree with the Berlins' strategy, as Berlin Toyota was rated the Number 1 truck dealer based on sales in Indi­ ana in 1992. The dealership had also led the region for auto­ mobile sales figures for several years. Berlin Toyota had received the Toyota President's Award in 1989 and 1990.

The dealership sold both new and used vehicles. In fact, the inventory of used vehicles was larger than the new car inventory on hand. Berlin turned to a visitor and said:

In the used car business I work hard at maintaining a delicate balance. Sometimes I buy a particu/m: model and year car for $13,000. The next week the same car can be bought for $15,()()(). If I'm confidmt that we can sell these cars at a reasonable profit, I'll buy the second car too. If we enter the two can on our books at actual purchase cost, I may be sending the wrong signals to my salespeople. Since their incm­ tive is based on sales profils, which car do you think the salespeople will want to sell first? That's right, the $13,()()() car. We could take this to the atreme, and before we know it, our used car lot could be full of unsold and high-cost cars.

So, I try to average out the purchase costs of similar cars so that the salespeople are not sent the wrong signals.

Turning to the used car lot, Berlin said:

The inventory you see out there is roughly worth $1.5 million. This is ·a lot of money at risk. It needs to

This case was prepared by Pekin Ogan, Indiana University, Bloomington, Indiana, U.S.A., as the basis for class d�ion rather than to illus­ trate either effective or ineffective handling of a managerial situation. Distributed by the Accounting E.ducation Resource Centre, The Univer­ sity of Lethbridge, C 1998. All rights reserved to the authors and to the Accounting E.ducation Resource Centre. Permission to use the case in classes of instruction, without restriction, is provided to subscribers of the journal. t This case bears a resemblance to Bultman Automobiles. However, the firm depicted in this case is an actual a>mpany and many of the peo­ ple are actual employees of the dealership. The events depicted were either recounted by the people involved or were actually observed by the author. The owners of the company wish their company to remain anonymous. Those names in brackets the first time they appear belong to the author's friends and family who are not associated with the dealership. It was necessary to protect the people involved because some of the issues were deemed sensitive by them. For competitive reasons financial data are provided for illustration purposes only and do not reflect actual facts.

The author gratefully acknowledges the helpful a>mments and suggestions of Mr. Dennis Beck, Mr. Danny Bogard, Mr. Mike Berry and Mr. Greg Rounds of [Berlin) Toyota. Elif H. Ogan, Christine L Ogan, Tom Miller of Royal Nissan, and Bruce Oendening of American Car and Truck provided many helpful suggestions. An anonymous reviewer's comments were extremely helpful and added clarity.

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