P 8-12 WWWeb Marketing WWWeb Marketing is a decentralized firm specializing in d

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P 8-12 WWWeb Marketing
WWWeb Marketing is a decentralized firm specializing in designing and operating Internet marketing Web sites. The firm is four years old and has been growing rapidly, but it only shows a small profit. WWWeb has three profit centers. Design Division, Server Operations, and the Crawler Division. The Design Division devises Internet marketing strategies for external clients, including innovative Web sites and Web-based marketing strategies. Server Operations maintains the clients' Web sites on WWWeb's servers. The Crawler Division operates WWWeb's proprietary search engine that clients for Internet-based marketing research. In addition to these three profit centers, WWWeb has an IT group that maintains WWWeb's servers and telecommunication lines to the Internet.
The IT group is a cost center. The current annual IT budget is $548,000 for personnel, hardware and software leases for the servers, and telecommunication costs. The cost of the IT group is not allocated back to the three divisions. The CEO of WWWeb argues that the IT group is a common (shared) resource and is essentially a fixed cost. Adding another client Web site or performing a Web search does not generate any additional IT cost to the firm because WWWeb's IT group has excess capacity.
WWWeb's CEO argues, "Any charge for IT back to the divisions will cause the division to avoid using our IT resources. As long as we have unused capacity on our systems we should be encouraging our people to use that capacity." WWWeb currently uses about 80 percent of the capacity of its servers, routers, and fiber optic high speed lines to the Internet. The high speed lines are the "pipes" through which all client server Web traffic flows. These high speed lines are so also used by WWWeb's e-mail traffic and the Crawler Divisions marketing research Web searches. Currently, the IT systems are performing well and WWWeb users experience few delays and minimal interference from other users. However, the three profit center managers are projecting growth in their businesses and expect capacity on their servers and communication lines within the next 12 months. When this happens, the managers predict that they will experience significant degradation.
Jose Coronas, head of WWWeb's IT group, has called a meeting of the three division managers to discuss the terrific deals being offered by telecom companies and hardware providers. Given the current slump in the economy, WWWeb can roughly double the capacity of its server

Explanation / Answer

First, let me tell you what is a profit centre and what is a cost centre. Profit centre means that there is no excess capacity. It means that with existing resources, the amount of work that could be done, is being done. Cost centre means that there is excess capacity. It means that with existing resources, the amount of work that could be done, is not being done. The three divisions are profit centre and the IT group is a cost centre. (a) As per the current policy of WWWeb, the costs of IT group is not being allocated to the theree divisions. This is faulty practice as WWWeb will never be able to analyse the efficiency of the IT Group. With a considerable mark up to its costs, IT group should provide the services the three divisions and evaluate its efficicency. It may happen that the cost incurred to operate the IT group does not justify its benefits and it may beneficial to outsource the work done by the IT group. WWeb should allocate the costs to the three divisions on the basis of network usage by the divisions. WWEb should acquire the additional capacity only after evaluating the efficiency of the IT Group. If they are efficient , then it should acquire additional capapcity in view of significant work coming in the future. (b) WWEb should allocate its costs to the three divisions on the basis of network usage and on the basis of time spent by its personnel. Happy tl help

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