Question

Burton Electronics produces radios, computers, and navigation systems. Although all high level decisions are made at company headquarters by top management, rapid expansion and increasingly specialized products have caused the company to consider decentralizing into three divisions. Each division manager would be responsible for costs, revenues, and investments in assets.

a. How should the company classify the three divisions, as cost centers, profit centers, or investment centers? Explain.

b. What are the potential advantages of decentralizing?

c. What are the potential disadvantages of decentralizing?

Answer 1

a)

Cost center:- It is responsible for tracking of expenses in a decentralized organization. For example, human resource department, IT Department, accounting department. Burton Electronics can identify all the departments in the organization which is focussed only on cost and assign them a separate division. This way their cost can be controlled and managers will be directly responsible for their actions and hence their accountability increases.

Investment center:- It is responsible to leverage assets by focussing on getting capital and investing that capital to get as much return on investment as possible. Burton Electronics can identify all activities relating to investment for example finance department and form a separate division for it. This way division can focus only on investment and become more efficient and productive.

Profit center:- It focuses on generating maximum revenue. Burton Electronics should identify all activities relating to sales like packing department, logistics department, marketing department, sales department etc and make a separate division for them. This way this division becomes independent and can generate maximum revenue.

b) Advantages of decentralization:-

1. Employees gain more responsibility and are motivated to become more efficient in their operation.

2. Top management can focus on strategic information instead of wasting their time in the day to day business activities.

3. Junior employees have more chance to develop since they get more responsibilities and get chance to promote to next level.

c) Disadvantages of decentralizing

1. Each division gets an allocated budget to spend, hence there is a fight between departments to get more and more budget. This might cause disharmony among divisions.

2. Training will be needed initially to work in a new environment which might add cost.

3. Change in business practice can face the resistance of employees.

4. Some managers might think that their power gets diminished in the new structure.

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