Suppose the CEO of a Major Corporation Has Five Subsidiary

question 104

Essay

Suppose the CEO of a major corporation has five subsidiary companies. Only one of these companies is making better than the return on similar investments that the company could be making if it invested its financial capital outside the company. The CEO tells each of these subsidiary companies that the rate of return that they are earning is not acceptable and must rise to the level of these identified companies. He tells them if they can't come up with a plan in twelve months that their companies will be sold. If each of these companies was actually making money can you come up with an economic argument for why it is still rational for this CEO to sell them if they don't abide by his directive.

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Definitions:

Manufacturing Overhead Applied

The allocation of estimated manufacturing overhead costs to individual units of production based on a predetermined rate.

Machine-Hours

A measure of the amount of time machines are operated, used as a basis for allocating manufacturing overhead costs in some costing systems.

Predetermined Overhead Rate

A rate used to allocate overhead costs to products or services, calculated based on estimated overhead and activity levels before the period begins.

Direct Labor-Hour

A measure of the labor time directly involved in the production of goods, usually quantified in hours.