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Unprofitable division sold and immediately profitable: why?

A major manufacturer decided to put one of its divisions up for sale because managerial accounting information showed the components produced by this division is losing money. A group of employees in the division purchased it. Under the new ownership, the division immediately became profitable.

A. Why do you think the division was profitable immediately under the new ownership?

B. What kind of cost allocation method may have caused the sale of a profitable division, and can you suggest a better method? Explain why?

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Solution Preview

One of the problems with less experiences managers is that they do not know to remove common or shared costs when analyzing if a product line or division is profitable. So, the division's sales less division-specific costs were ...

Solution Summary

Your discussion is 162 words and explains what likely happened and how to avoid it.