Reference no: EM133123796

Analyze the financial data in the case relative to revenue, profit, and margins. What makes the business profitable?

What trends do you see in Auto World's financial situation? Use case data (numbers) to support your answers.

This is not a question you can answer superficially; it is recommended you use a spreadsheet.

Labor Costs 75$/hour in service department

By national standards, Sullivan Ford Auto World stood toward the lower end of medium-sized dealerships, selling around 1,100 cars a year, equally divided between new and used vehicles. In the most recent year, its revenues totaled US$26.6 million from new and used car sales and US$2.9 million from service and parts-down from US$30.5 million and US$3.6 million, respectively, in the previous year. Although the unit value of car sales was high, the margins were quite low, with margins for new cars being substantially lower than those for used ones.

Industry guidelines suggested that the contribution margin (known as the departmental selling gross) from car sales should be about 5.5% of sales revenues and around 25% of revenues from service. In a typical dealership, 60% of the selling gross would traditionally come from sales and 40% from service, but the balance was shifting from sales to service.

The selling gross was then applied to fixed expenses, such as administrative salaries, rent or mortgage payments, and utilities.

For the most recent 12 months at Auto World, Sullivan- Diaz had determined that the selling gross figures were 4.6% and 24% respectively. Both these figures were lower than those of the previous year and insufficient to cover the dealership's fixed expenses. Sullivan-Diaz's father had made no mention of financial difficulties, and she had been shocked to learn from the bank after his death that Auto World had been two months behind in mortgage payments on the property. Further analysis also showed that accounts payable had risen sharply in the previous six months. Fortunately, the dealership held a large insurance policy on Sullivan's life, and the proceeds from this were more than sufficient to bring mortgage payments up to date, pay down all overdue accounts, and leave some funds for future contingencies.