Freeman Company has five divisions, and you are the division manager of one of these divisions.

Assume that the Administrative Costs for Freeman Company represent corporate-sustaining fixed costs that are allocated to each division based on the division's total assets. These costs represent long term commitments that cannot be changed within the next two years. Freeman Company decides to shut-down on of the other divisions (not your division) and dispose of the shut-down division's assets.

A. (6 points) How would this decision affectyour division's profits? Make sure you explain your logic.

Because one of the five divisions is shut down, the fixed cost burden which was allocated to five accounts earlier in ratio of their assets will now get allocated between four active divisions. As a result, your division's fixed cost burden will go up in any scenario of revised asset ratio for the active departments. If the fixed costs go up, the margins will come down with equal quantum if sales can't be improved or other costs can't reduced. This additional burden of fixed cost pertaining to 5th department will be borne by all active divisions in new ratio of available assets.

B. (6 points) Describe how your answer to Part A relates to theinterdependency problemof motivating performance.

C. (6 points) Describe how your answer to Part A relates to thedeath spiralphenomenon.