The Pitt Corporation Has Been Outsourcing Data Processing in the Belief

question 110

Essay

The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in corporate profitability.
Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was computed and compared to the price of the outside supplier. The price of the outside supplier was lower and thus, the outside bid was accepted.
Required:
Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost allocation method used.

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Definitions:

Market

An area or arena in which commercial dealings are conducted, often defined by the exchange of goods, services, or information between buyers and sellers.

Required Rate of Return

The minimum expected yield by investors to compensate for the risk of holding a particular investment.

Beta

An indicator of how much the risk of a security or a portfolio, known as systematic risk, fluctuates in relation to the overall market.

Expected Rate of Return

This refers to the anticipated gain or loss of an investment, expressed as a percentage of the investment's initial cost.