Choice of Strategic Business Unit
Required For each of the following cases, determine whether the business unit should be evaluated as a cost center or a profit center and explain why. If you choose cost center, then explain which type of cost center, the discretionary-cost center or the engineered-cost center.
1. A trucking firm has experienced a rapid increase in fuel costs and has only been partly successful in passing along the increased costs to customers. In recent months, fuel prices have come back down, but the firm's management knows to expect a continued volatility in the cost of fuel. To secure the firm's profits when fuel costs are rising, the company has established an Office of Sustainability to develop and implement a strategy for reducing costs and reducing the firm's overall carbon footprint.
2. To more effectively compete in a dynamic market for consumer electronics, a manufacturer of con- sumer electronics products has established a new department for Innovation and Refinement that reports directly to the chief operating officer (COO). The role of the new department is to develop new products and to refine existing products that keep the firm on the leading edge of innovation in the industry. A key tool of the new department is to use predictive analytics, a type of statistical analysis that is used to analyze market trends, consumer data, and economics forecasts, to best identify the products that con- sumers want and what types of innovation are most likely to be valued.
3. The recent economic downturn has convinced Marshall Clothing Stores Inc. to initiate risk management practices and to locate this activity in a new department that reports directly to the chief financial officer (CFO). The objectives of risk management are to identify significant new risks that could potentially affect the company in the coming one to five years and to develop plans for adapting to the risk. For example, the company is concerned about the rapidly increasing inventories in certain departments of its stores, due to unexpected decrease in demand in these areas. The company faces losses on selling these items at a discount.