Was reallocation of fixed costs across divisions unethical

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Reference no: EM1375347

"Blake Romney became Chief Executive Officer of Peters Inc. 2 years ago. At the time, the corporation was reporting lagging profits, and Blake was brought in to "stir things up." The company has 3 divisions, electronics, fiber optics, and plumbing supplies. Blake has no interest in plumbing supplies, and one of things he did was to put pressure on his accountants to re-allocate some of the company's fixed costs away from the other two divisions to the plumbing division. This had effect of causing the plumbing division to report losses during the last two years; in the past it had always reported low, but acceptable, net income. Blake felt that this re-allocation would shine a favorable light on him in front of the board of directors because it meant that electronics and fiber optics divisions would look like they were improving. Given that these are "businesses of future," he believed that the stock market would react favorably to these increases, while not penalizing poor results of the plumbing division. Without this shift in allocation of the fixed costs, the profits of electronics and fiber optics divisions would not have enhanced. Now the board of directors has suggested that plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, numerous of whom have worked for Peters their whole lives, would lose their jobs.

1. If a division is reporting losses, does that essentially mean that it should be closed?

2. Was reallocation of fixed costs across divisions unethical?

3. What should Blake do?"

Reference no: EM1375347

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