Division managers’ reactions to the allocation of central corporate costs to divisions

(continuation of 14-35). Dusty Rhodes presents his proposal for the use offour separate cost pools to allocate central corporate costs to the divisions. The comments ofthe top managers of each ofthe four divisions include the following:

a. By the top manager of the Oil and Gas Upstream Division: “The multiple-pool method of Rhodes’s is absurd. We are the only division generating a substantial positive cash flow, and this is ignored in the proposed (and indeed the existing) system. We could pay off any debt very quickly if we were not a cash cow for the rest of the dog divisions in Richfield Oil.” 1

b. By the top manager of the Oil and Gas Downstream Division: “Rhodes’s proposal is the first sign that the money we spend in the accounting and control function at corporate headquarters is justified. The proposal is fair and equitable.”

c. By the top manager of the Chemical Products Division: “I oppose any cost-allocation method. Last year I was the only major player in the chemical industry to show a positive operating income. We are operating at the bare-bones level. Last year I saved $300,000 by making everyone travel economy class. This policy created a lot of dissatisfaction, but we finally managed to get it accepted. Then at the end ofthe year we get a charge of$400 million for corporate central costs. What’s the point of our division economy drives when they get swamped by allocations of corporate fat?”

d. By the top manager of Copper Mining Division: “I should probably get concerned, but frankly I view it all as bookkeeping entries. If we were in the black, certain aspects would really infuriate me. For instance, why should corporate R&D costs be allocated to the Copper Division? The only research corporate does for us is how to best prepare our division for divestiture.”

^JSUQUIRED w"' How should Rhodes respond to these comments?