Brad’s company, an eastern based firm, is going through tough times. Downsizing

Question

Brad’s company, an eastern based firm, is going through tough times. Downsizing is the only way to keep the company from going bankrupt. Brad has been given the assignment to eliminate an unprofitable region. His analysis has shown that the southwest region has a positive contribution margin but a net loss due to fixed costs. The western region has a positive contribution margin and a net loss. The eastern region has a positive contribution margin and a net income. The northeastern region has a positive contribution margin but a net loss. Brad further discovers that the net losses of the western and southwestern regions are due to fixed costs. Further investigation finds that the fixed costs can be separated by region costs and corporate costs. In Brad’s investigation, the eastern region, though having all the costs of a corporate office, has lower fixed costs, making it a profitable region. Brad finds that Joe Black, the manager of the eastern region, has decided to allocate all the corporate office expenses to the other three divisions to make his region appear more profitable. More analysis indicates that if the corporate offices are allocated evenly to all four regions, the eastern region would have a net loss and the other regions would have a slight net income. What should Brad do? Should Joe have the ability to allocate costs to other regions?

Explanation / Answer

Brad should report the matters to top level management. He has to present the report with reallocated cost ie allocating corprate office fixed cost evenly to all four regions. The reallocation will result a loss to eastern region. He also analyse the sales volume and other related information to ensure that evenly allocation of corprate cost is justifiable. The reason for loss is corprate fixed cost. The elimination of a region will not result any reduction in corprate fixed cost. It is period cost, Since all three regions are operating corprate office cost will be incured. It is advisable to focus on sales and increase it to maximum. Since all region has positive contribution each unit increase in sales will reduce the loss.

Joe is only a region's manager. He has no right to alloacte corppppprate cos to other region. He has to absorb the portion of cost allocated to him. The cost allocation policy decided at corprate office level should not be violated by region manager. He has to follow the same.

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