Task 1 (10 marks) (approximately 500 words)

Blake Romney became Chief Executive Officer of Peters Inc. two 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, fibre 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 companys 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 two

years; in the past it had always reported low, but acceptable, net income.

Blake felt that this reallocation would shine a favourable light on him in front of the board of directors

because it meant that the electronics and fibre optics divisions would look like they were improving.

Given that these are businesses of the future, he believed that the stock market would react

favourably 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 fibre 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.

Required

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

2. Was the reallocation of fixed costs across divisions unethical?

3. What should Blake do?