Question

In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations?

Answer 1

It is possible if the common cost allocated to the divisions are based on allocation methods that penalize the firm. For example, the most profitable firm may use the largest amount of building, equipment, and land resources and is allocated costs that wipe out much of the operating income. Or it may be allocated a large amount of common administrative costs because it has more personnel than other divisions. You really have to look at the situation in question.

What many people do not understand, that a division may actually be unprofitable but has to be kept operating because if it is shut down, the common costs allocated to it have to be spread among the remaining divisions which may make another one unprofitable.

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