Question

Harold Dean became Chief Executive Officer of Wriston Manufacturing two years ago. At that
time, the company was reporting lagging profits, and Harold was brought in to “stir things up.”
The company has three divisions; electronics, fiber optics, and plumbing supplies. Harold has no
interest in plumbing supplies, and one of the first things he did was to put pressure on his
accountants to reallocate some of the company’s fixed costs away from the other two divisions to
the plumbing division. This had the effect of causing the plumbing division to report losses
during the last two years; in the past it has always reported low, but acceptable, net income.
Harold felt that this reallocation would shine a favorable light on him in front of the board of
directors because it meant that the electronics and fiber optics divisions would look like they were
improving. Given that these are “businesses of the future,” he believed that the stock market
would react favorably to these increases, while not penalizing the poor results of the plumbing
division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber
optics divisions would not have improved. But now the board of directors has suggested that the
plumbing division be closed because it is reporting losses. This would mean that nearly 500
employees, many of whom have worked for Wriston their whole lives, would lose their jobs.

a) If a division is reporting losses, does that necessarily mean that it should be closed? Explain.
b) Was the reallocation of fixed costs across divisions unethical? Explain.
c) What should Harold do now that the plumbing division may be closed?

Answer 1

Answer for a)

In any case liquidation must be the final option of the organisation.However even though the company closes it's division there is no assurance that profit will go up.There many other cases like loss in employment of many people may effect the morale of the employees of other divisions also i.e it may creat a sense of insecurity towards the job.

Answer for b)

In my opinion reallocation of fixed costs across divisions was unethical.But,in this case it was given that Harold Dean have no interest towards plumbing department.If the reallocation was purely based on his personal interest than it is unethical even though there is increase in profit of other divisions.

Answer for c)

Harold must not simply close the plumbing department. Instead, ifpossible he must reallocate the fixed costs in such a way that all the divisions perform equally good. Otherwise he must implement some other ways to improve profits like giving incentives to boost up the spirit of employees, cutting down unnecessary costs which inturn doesn't show effect on quality of product or goodwill in the customers as it may result in loss of huge employment as it may also create negative impression in minds of the investors.