During the 1980s and early 1990s, IBM had the policy of allocating costs from one line of business to another. Managers

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During The 1980s And Early 1990s Ibm Had The Policy Of Allocating Costs From One Line Of Business To Another Managers 1 (1002.9 KiB) Viewed 45 times

Read the following excerpt about cost allocation at IBM andanswer the following questions:
a. Discuss the weakness(es) of the cost allocation systemrelated to R&D used by IBM and how you would improve it. (5points)
b. Do you agree with IBM’s policy to allocate costs from oneline of business to another? Justify your answer. (5 points)
During the 1980s and early 1990s, IBM had the policy of allocating costs from one line of business to another. Managers in those lines of business constantly argued that some of their overhead should be carried by other IBM businesses. IBM also typically allocated all of the R&D of a new technology to the line of business first using the tech- nology, and subsequent users were able to utilize it for free. The cost allocation system masked the true profitability of many IBM businesses for years. IBM claimed it was making money in its PC business. But in 1992, "as IBM began to move away from its funny allocation system, IBM disclosed that its PC business was unprofitable." In 2004, IBM sold its PC division to China-based Lenovo Group for $1.75 billion. SOURCES: P. Carroll, "The Failures of Central Planning-at IBM," The Wall Street Journal, January 28, 1993, p. A14; "IBM Sells PC Business to China's Lenovo," AP, December 8, 2004.