The CEO of Always Round Tire has decided to open a battery division. He thinks that batteries would sell well with tires at their outlets AND that Always Round's quality reputation will be transferred to the batteries. Should he set up the new division as a Revenue Center, as a Profit Center, or as an Investment Center? Why?

Question

Quizplus · Accepted Answer

The Answer is The new division should be set up as a profit center. Batteries are a separate product from tires and therefore the division's profitability can be easily measured and rewarded. A revenue center with pricing authority would set price lower than the profit-maximizing price which would reduce the value of the firm. The CEO should be aware that incentives at the retail level will need to support both tire sales and battery sales. In addition, he should take steps to guard against double markups in transfer pricing from the battery division to the retail outlets.

The CEO of Always Round Tire Has Decided to Open