What Value Should We Place on the Clunker?
The Ritchie Automobile Agency is an exclusive agency for the sale of foreign sports cars. As part of its sales strategy, Ritchie allows liberal trade in allowances on the sale of its new cars. A used car division of the company sells these trade ins at a separate location, usually at an amount significantly lower than the trade in allowance. This division is continually showing large losses because the cars are charged to the division at their trade in values. John Lund, manager of the used car division, has requested that the costing procedure be changed and that trade ins be recorded at a price sufficiently below expected retail to allow a reasonable profit to his division. Janet Perry, controller of the agency, acknowledges that some adjustment needs to be made to the inflated trade in values, but she feels that expected retail value should be used without allowance for a profit. What value should be used to record the trade ins?