Two Division managers at King Size Manufacturing have been in a long discussion

Question

Two Division managers at King Size Manufacturing have been in a long discussion with top management about allocation of capital spending over the next three years. The current plan up for approval calls for the bulk of capital expenditures to go to Division H whic historically has been the larger division of the firm. The manager defends this decision because, he says, his division has been providing the bulk of the profits for the company. Division J is smaller, and its manager syays that it is time to make the divisions more even in size. His bonus is based on total sales and he wants a larger bonus for himslef and his management team. You have been called in to assist management in seeking a solution to this disagreement. What do you recommend?

Explanation / Answer

The allocation of resources and capital to any of departments should be based on some kind of parameters.

In my opinion, the parameters for allocation should be based on the following.

The amount of revenue being contributed by the Division. If Division J has prepared substantial plans which shows the basis on which revenues would be generated and what all areas in which the division is planning to invest in order to increase its revenues. In that case, capital needs to be contributed to the smaller division.
Division H is a big department but we need to understand the rationale for having an increased or more expenditure in the division. It is not necessary that if a division is big it requires the highest amount of capitalisation.

In my opinion, the decision for allotting the capital should be based purely on the merits and requirements of the division. If the respective division managers come out with concrete plans then the allocation should be made based on the overall capital budget of the company vis-à-vis the explanation and future goals given by division H and J respectively.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.