term definitions

[LamboThom]

What is " Fixed Absorption"?
What is "Gross Transfer"?

[AKTOYPM]

FIXED ABSORption is the percentage of all expenses theoretically covered by the parts/service/body shop departments.
If you had 100% absorption then sales would need to sell zero cars to pay the bills (and all car sales would be profit)
That is what is strived for.
Gross transfer is at the end of financial statement, some places/MFG float parts gross into service- reason being that service theoretically sold the parts.
Someone may have beaten me to the reply, I was interupted.

[DealerProfit]

Close,

Fixed absorption is the percentage of FIXED expense covered by Service, Parts, and Body Shop after paying direct departmental expenses.

In other words the variable departments would still have to cover there direct expenses such as Personnel, Policy Adj, Advertising, etc.....

Gross Transfer is the transfer of 1/2 of the gross profit generated on Customer paid repair order parts sales from the Parts Department to the Service Department.

[scotstrong]

Dealer Profit:

Would you be so kind as to cite the source of your definition of "fixed absorption"? AKTOYPM's definition is exactly what is espoused by NADA, the big 3, and any other source I have ever heard: coverage of TOTAL dealership expenses; not just fixed.
Is this a new deviation from the historical measurement?

[texaslp]

Agree with Scot, it's total fixed overhead expense.

AKTOYPM ,maybe your confusion is that "total fixed" overhead includes semi-fixed, like advertising,etc. Only variable is not included in total fixed.

[Gerry Laughlin]

From the accounting manual:

Fixed Coverage
Computations
Fixed Operations
This calculates the percent of total fixed overhead expenses that are covered from sales of the
Parts, Mechanical and Body Shop Departments. (Also called Service Absorption)
Example:
Year-to-Date
Fixed gross profit $503,000
Divided by: )
Total Fixed Overhead expense $823,000
FIXED COVERAGE 61%

This is from page L32 of the GM Standards of Accounting.
The following is from the definitions section of the same manual:
Fixed Coverage- A measure of the fixed gross profit expressed as a percentage
of total fixed overhead expense. The ratio is intended primarily
as a measure of the effectiveness of the Service and the Parts
and Accessories Departments in the context of the dealerships
total expense structure.
Fixed Expenses- Operating expenses which do not vary materially in the short
term with changes in sales volume.
Fixed Gross Profit- The combined gross profits of the Service and the Parts and
Accessories Department.
Fixed Net Loss- The excess of the total fixed overhead expense over the
combined gross profits of the Service and the Parts and
Accessories Departments. See Unabsorbed Overhead.
Fixed Overhead Expenses- Expenses that do not vary proportionately with vehicle sales.
These include personnel, semi-fixed and fixed expenses.

Good Luck
Gerry

[This message has been edited by Gerry Laughlin (edited 10-17-2007).]

[This message has been edited by Gerry Laughlin (edited 10-17-2007).]

[AKTOYPM]

So let me put it a different way and make sure I am clear?
Absorption is the percentage of expenses that Service,Parts,Body would cover with the gross they made. Assuming that sales did not exist (thereby not having any commisions-selling expenses,advertising,policy /variable expenses)
we still pay the heat/lights/gas/rent/
makes sense.

[Gerry Laughlin]

According to the GM finanacial statement variable selling expense includes "Vehicle salespeople compensation, delivery expense, policy work-vehicles", all othe expenses would be used in your "Fixed apbsorption" calculation.
So if your dealership had total expenses of 500,000. but 50,000 was from the salespeople compensation, delivery expense, policy work-vehicles, then your total fixed overhead would be 450,000. This 450,000 does include the heat, personel, and all the other expenses not listed above (salespeople compensation, delivery expense, policy work-vehicles) that are still genereated by the variable operations. So lets assume the Service, Parts and Body shop had a combined total Gross of $250,000 your Fixed absorption would be 56%.
Gerry

[DealerProfit]

AK yes

The calculation has been revisited a number of times, and is in use to my knowledge in two very specific forms to this very day!

For those who want to inflate their number to make themselves feel good the calc is
Fixed Gross Profit divided by Fixed Expense.
here is where we feel good! Load all of your fixed expenses in to departmental expense and your coverage percentage goes up like a rocket.

Now if you would like to use the true measurement of the health of your fixed operations make sure all of your expenses are accounted for per the ENTIRE accounting manual. Fixed Operations Gross Profit less Direct Departmental Expenses divided by Fixed expense.

I have taught this at many twenty group meetings and never once have I been rebuked by dealer or moderator. It is a tool to help us make our stores better