Companies Often Allocate Common Fixed Costs Among Segments

question 350

Essay

Companies often allocate common fixed costs among segments. For example, common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports.
Required:
What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division?

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Definitions:

Repurchase Shares

The act of a company buying back its own shares from the marketplace, reducing the amount of outstanding stock.

Debt-Equity Ratio

A ratio showcasing the relative utilization of debt and equity in the financial structuring of a company’s assets.

Required Return

The minimum expected return by an investor for investing in a particular security or project, considering the risk associated with the investment.

M&M II

Part of Modigliani and Miller's capital structure theories, specifically the proposition that the value of a firm is independent of its capital structure under certain market conditions and tax considerations.