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Book/movie review
22/08/2022
Blake Romney became chief executive officer of Peters Inc. 2 years ago. At the time, the company was reporting lagging profits, and Blake was brought in to “stir things up.” The company has three divisions: electronics, fiber optics, and plumbing supplies. Blake 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 2 years; in the past it had always reported low, but acceptable, net income. Blake 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 Peters their whole lives, would lose their jobs.
Instructions
If a division is reporting losses, does that necessarily mean that it should be closed?
Was the reallocation of fixed costs across divisions unethical?
What should Blake do?
Post by classmate 1
If a division is reporting losses, that does not necessarily mean that it should be closed. I think this is a good question because as I was reading the chapter, I was wondering how long of reporting losses should a company wait until they shut down the company. Some companies do a yearly audit, do you wait until then to see the problems? Do you need to do monthly or six month audits? Do you wait until you are starting to risk going bankrupt, is that too late? I guess each company is different, has its own circumstances that would determine when they should cut their losses.
In this instance I would say allocating the fixed costs to other divisions is unethical. I think what makes it unethical is the intensions behind it. Just because Blake does not have an interest in plumbing supplies does not justify allocating the fixed costs. Another reason would be that the company is having a lagging profit problem, closing the plumbing division would just bring them back to that same problem. It does not address the profit problem; it just hides it for a certain amount of time. “Unless fixed costs are allocated properly, the resulting information may lead management to make faulty decisions based on erroneous assumptions (Parker, 2016)”. The problem Blake has created is going to lead to other problems.
Blake should resign, at least come clean about what he told the accountants to do, let the board of directors choose his fate. It appears Blake was in over his head to begin with. If Blake’s only option when coming into this position is to manipulate the accounts to show a profit, it was a mistake to put Blake in this position. Especially since it mentions the plumbing divisions had an acceptable net income.
Reference:
Parker, Mike. “The Disadvantages of Allocating Fixed Costs.” Small Business – Chron.Com, 26 Oct. 2016, smallbusiness.chron.com/disadvantages-allocating-fixed-costs-39491.html.
Post by classmate 2
Shady Blake what a snake. Peters Inc. should not close the plumbing supplies division due to the change in accounting practices creating losses. This division is not truly losing the money that Blake is trying to show them losing. That is one reason the division should not be closed the other reasoning being that the board really has to look at the sunk costs of dissolving the division. The sunk costs that Peters Inc. would incur are the expenses that will continue no matter the division being closed (Ross, 2021). The problem with dissolving the plumbing division is the costs the company will still incur. Blake tried to hide fixed costs in this division and now when the division goes away, and the company is still having these costs what is the board going to think? The board instead needs to look at what changed in the last two years within the division and see if the losses can be attributed to specific changes.
I do feel the moving of fixed costs was unethical as Blake is screwing up a lot of people’s lives for no reason. There are no economic bases for want to get rid of the division. If there was factual reason to add the costs to that division, it would be a different story.
At this point Blake has done too much, he should but will not own up to the fact he has a personal vendetta against the division. It is in the board and hopefully accountant’s hands to determine what has happened to the division and see if they can redeem the division back to profitability.
The writer is very fast, professional and responded to the review request fast also. Thank you.
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