JMJ Marist

Brothers
Notre Dame of Marbel University
Graduate School
Master in Business Administration (MBA) Program

Case Study 23-1

Tru-Fit Parts, Inc.

In Partial Fulfillment
Of the Requirements in
BA-237 Managerial Accounting

CaseAnalysis231TruFitParts,Inc.
I.

BriefSummaryoftheCase
TruFitPartsInc.,isamanufacturerofvarietyofpartsforuseinautomobiles,trucks,busesand
farm equipment. TruFit parts were sold both to originalequipment manufacturers (OEM
Market)andtowholesalers(theaftermarketorAM).TruFithadmanufacturingdivisionsofits
threeproductgroupings(ignitionparts,transmissionpartsandengineparts.Eachplantofthe
manufacturing division is treated as an investment center and responsible for not only
manufacturingpartsbutalsoforsellingitspartstoOEMmarket.Eachmanufacturingdivision
soldpartstothefourthdivision,AMMarketingthatissolelyresponsibleformarketingallTru
FitPartstoAMwholesalers.Thetopmanagementidentifiedthreeareasofconcernasfollows:
a. FewdisputesovertransferpricesfromthemanufacturingdivisiontoAMMarketing.
b. AMMarketingisbeingtreatedasacaptivecustomer.
c. BothAMMarketingandthethreemanufacturingdivisioncarriedexcessiveinventories
mostoftheyear.

II.
CASEQUESTIONS
1. Whatwouldyourecommendtotopmanagementregardingthethreeproblemsthey
haveidentified?
A. DisputesonTransferPrice
Transfer price disputes usually occurs if the part is an AM part. The company
virtuallydoesnothavedisputesonOEMproductsbecausetheynormallysetthe
transferpricebasedonpreviousorcurrentOEMmarketprice.TheAMpartdonot
havethesetoestablishtheprice.
Recommendation:

Itisveryimportantthattransferpricesmustbeestablishedtopreventdisputes.Itis
evidentinthepartofOEMproductswhichrarelyencountersthistypeofdisputes
sincetheyareabletoestablishtheirtransferprice.Itisrecommendedthatifthere
arenodatainthethreedivisionstosettheprice,theymightwanttocompareitwith
othercompanieswhohavethesameproductsasitsbenchmark.Anotheroptionisto
set the price by computing the costs in manufacturing plus a mark up price.
Dependingalsoonthecultureoftheorganization,suchdisputesshouldberesolved
withopencommunicationlikethethreemajordivisionsdid(arbitrationbycorporate
controller)ifthetransferpriceisnotyetset.
B. ManufacturingdivisionstendedtotreatAMMarketingasaCaptiveMarket.
TheTruFitManagementwantedtoprotecttheoverallimageofthecompanybynot
allowingtheAMmarketingtosellacompetitorsproduct.Thethreedivisionswould
tendtofavorOEMcustomersorAMMarketingintimesofstiffdemandbecausethey
believedthatOEMcustomerscantaketheirbusinesselsewhere.
Recommendation:
Itismentionedinthecasethatthesumoffourdivisionssaleswasabout$1billion
and$360millionisattributedbyAMMarketinghigherthantheotherthreedivisions.
TheTruFitManagementclearlyfavorsAMMarketingasbeingprofitableincreasing
itssalestargetfrom45percentto50percent.TherecommendationistomakeAM
Marketingbemorefavorabletothethreedivisions.Theycandothesebyestablishing
acompetitivetransferprice.Thetransferpriceestablishedcanbeaddedalsowith
otherbenefitstomakeitmoreappealing.Themanagementcanalsogivethedecision
onhowshouldtheproductsbeallocatedtobothOEMandAMwhendemandisvery

stiffanddonotletthedivisionfavormoretheOEMoverAM.Althoughthismight
contradictwiththemanagementgoalofprotectingitsimagebynotallowingother
productsormaterialstobesoldintheAMMarket,theymightwanttoconsiderAM
Marketingtobuyoutsideordevelopitsownproductstoincreaseitssales.Another
recommendationistolettheotherthreedivisionstocaternotonlytoOEMcustomers
butbealsoopenedtoAMmarketsinsteadofonlytheAMMarketdivisionsinceall
theotherthreedivisionshavetheirownsalesdepartment.
C. Both AM Marketing and the three manufacturing division carried excessive
inventoriesmostoftheyear.
Recommendation:
Ithinkthattheproblemismoreontheproductionforecastofthecompanyratherthan
theirgenerousChristmasvacationswhichtheyclaimedbringsdowntheinventorytothe
desiredlevel.Iwouldrecommendthatamoreaccurateforecastingmightbedone.They
mightwanttoreviewprevioussalesofthecompanyastheirbasisonproduction.There
are various ways also to reduce inventory on warehouses like the JIT ordering of
materials.ThereshouldalsobegoodcommunicationwithOEMcustomersastowhen
andhowmuchordersareneeded.

2. Are there any matters not mentioned by top management that you feel are
problematical?
Ithinkthatmaybethecompanywouldbeopentothesuggestiononopeningthethree
majordivisionsofthecompanytobeopennotonlytoOEMmarketbutalsotoAM
Markets.Ibelievedthatthiswillstrengthenedmoretherevenuegeneratingcapacityof

thewholecompany.Theycanreachoutalsotomorecustomerswiththis.Anotherissue
istheincentivebonusplan.Althoughothersmightnotagreeanddeemedthatitisunfair
tomakeitmorebeneficialtothosewhoareinthehigherhierarchy,Idoagreeonthison
a certain point. Incentive bonus should be given on the basis that the company has
reacheditstargetrevenueattheendoftheyear.Thebonuscanbebasedonthesalaryof
theemployee.Idefinitelybelievedthatthoseonthehigherhierarchyoforganizations
have more responsibilities and have gained experience hence should be rewarded
accordingly.IdoagreealsoonthediscretionarypartoftheSupervisorstoaccord25%
upwardonthebonusbutnotdownward.Thisdiscretionshouldbegiventothesuperiors
torewardemployeeswhohadclearlyexcelledinperformingthejob.