Analysis of the Situation at Peters Inc.
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?
Analysis of the Situation at Peters Inc.
If a division is reporting losses, does that necessarily mean that it should be closed?
No, the fact that the plumbing division is reporting losses does not necessarily mean that it should be closed. There could be various reasons for the division’s poor financial performance, such as temporary market conditions, mismanagement, or lack of investment. Closing the division without thoroughly analyzing the underlying causes and exploring potential solutions may not be the most prudent decision.
Was the reallocation of fixed costs across divisions unethical?
Yes, the reallocation of fixed costs by Blake Romney can be considered unethical. By shifting costs from the electronics and fiber optics divisions to the plumbing division, Blake artificially created losses in the plumbing division, which had previously been reporting acceptable net income. This manipulation was done solely to make the other divisions appear more profitable and to enhance Blake’s image in front of the board of directors. Such actions not only deceive stakeholders but also jeopardize the jobs of hundreds of employees who have dedicated their careers to Peters Inc.
What should Blake do?
Blake should rectify the unethical reallocation of fixed costs and address the issues in the plumbing division in an ethical and responsible manner. Rather than closing the division outright, Blake should focus on identifying and resolving the underlying problems causing the division’s losses. This may involve conducting a thorough analysis of its operations, evaluating market conditions, and implementing strategic changes to improve performance.
Additionally, Blake should consider involving the employees and their expertise in finding solutions. They may have valuable insights and suggestions for turning around the division’s financial situation. By respecting their contributions and involving them in decision-making processes, Blake can demonstrate good leadership and foster a sense of teamwork and commitment among employees.
Ultimately, Blake must prioritize the long-term success of Peters Inc. by ensuring ethical conduct, fair treatment of employees, and sustainable strategies for all divisions. This approach will lead to a more positive work environment, stronger stakeholder relationships, and ultimately, better financial results for the company as a whole.