Unit II Case Study
Read “The DMV” on pages 75-78 of your textbook, and complete questions 1-5 that begin at the bottom of page 77 and
continue to the top of page 78.
Also, complete all sections in problem 3-30 located on page 106 of your textbook.
1. Prepare a monthly operating budget for the DMV for the fiscal year ending August 31, 2014.
See Excel, attached, for two tabs, base information and operating budget. The operating budget is “linked” to all the base information so that if it changes, so does the budget (using formulas). To see the formulas, click in the cells. This budget uses the transactions details and the price per transaction to create the inflows and outflows.
2. To what do you attribute the changing surplus/deficit pattern during the year?
The operating budget shows a surplus in the first four months but then shows an operating deficit for the eight months after that. This is mainly due to the driver’s license fee and cost changes. The fees went up from $25 to $30 per license but the cost of the outside contractor to issue those licenses went from $10 to $37 each. In fact, the new technology fees of $30 do not cover the cost of $37 so they are losing $7 per license issued.
3. What would happen to the overall deficit or surplus if the number of vehicles failing inspections increased from 15 percent to 30 percent? Keep in mind that vehicles must be re-inspected, so this would also increase the total number of inspections. Does this give the DMV a reason to make its standards tougher? Is this good policy?
The overall deficit would turn into a surplus of $1,215.005 (see tab “analysis of failures”). While this does create a surplus, which is desirable, it also may create friction in the community. It could also create more compliance so that folks figure out that the standard has gotten stricter and make sure that they are compliant prior to coming for inspection. If so, the extra fees will not persist for very long as the community adjusts to the new standards. On the other hand, the stricter policy may help to be sure that vehicles are safer for the community and remove vehicles from the roads that should not be in operation. It may also create demand for newer vehicles and improve the local economy with the extra activity. So, while the higher demands improve the operating budget, such a policy change may have a positive or negative impact on the community and thus creates pressure or support from constituents. If the community feels the policy improves safety and the economy, the policy may be a good one. If the policy would just improve compliance and therefore not generate the expected fees, it would be ineffective except in the short run. The case doesn’t give us enough details about the qualitative factors to make a definite conclusion about the merit of the policy. We can say it would be one way to solve the deficit.
4. Suppose the DMV can choose when to implement the new digitized licensing system.
a. What would happen to the finances of the DMV if the new licenses are implemented at the beginning of the year and issued throughout the year?
If the new licenses are issued at the beginning of the year, the operating budget would be worse. That is, the deficit would be higher since the operating budget generates surpluses in the months when the old technology is in place and generates a deficit with the new technology (see question 1 above for more details on this negative contribution margin of $7).
b. What would happen if the new licenses are not implemented at all during the coming year? In either case, assume the total number of licenses issued for any month does not change. Is that assumption realistic? How does it affect your results?
See separate excel file for “no new licenses” where I assume that the annual license demand is even (no need to hurry and get them done early to avoid price increase).
It is probably not realistic to think demand will be heavier in the early months without the price change. The assumption that annual demand for licenses is the same but spread more evenly across the months is likely more reasonable as the number of drivers will not change with the technology (no one is going to stop driving because of a $5 fee) and there is no reason to hurry to do it early. In any case, the monthly results change with the demand assumption but the annual results are the same (fees and costs are same so spreading the activity differently across the months doesn’t change total for year).
5. What other changes would you suggest that might help the DMV’s situation? What are the advantages and disadvantages of the various suggested changes? Select the approach that you believe is best, create a worksheet showing the resulting budget, and provide an explanation defending your choice of changes.
There are a number of strategies you might try, all of which have advantages and disadvantages. Here are a few:
1. Work with the vendor to alter the cost to get to breakeven contribution margin. That is, get them to do it for $30 rather than $37 or bid out to a wider vendor pool.
a. Advantage: gets rid of negative contribution margin
b. Advantage: Puts vendors on notice that high fees will cause competition
c. Disadvantage: May cause a lowering of quality
d. Disadvantage: May eliminate some of the security features desired
2. Implement the stricter inspection policy.
a. Advantage: improved safety
b. Advantage: avoids deficits
c. Disadvantage: may be temporary fix
d. Disadvantage: may irritate community
3. Require everyone to get new license plates
a. Advantage: creates revenue
b. Advantage: increases economic activity in community (vendor hires more)
c. Disadvantage: may irritate community
d. Disadvantage: may be seen as wasteful and add to landfill
4. Charge for re-testing, written or road.
a. Advantage: creates revenue
b. Advantage: makes those who come unprepared pay for added activity
c. Disadvantage: may overload office
d. Disadvantage: requires political process to approve
In my view, the two best are to get the cost of licensing below the fee and charge for re-testing. I have created a spreadsheet showing that even if only a very few need retesting, and pay the same failure fee as inspections, the budget covers the new technology (no months have a deficit).
Section 3-30: Please see attached Excel “State Department of Labor”.