Reference no: EM13599531
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 maintain s the clients' Web sites on WWWeb servers. The Crawler Division operates WWWeb's proprietary search engine that clients can use 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 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 also used by WWWeb's email traffic and the crawler Division s 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 to reach capacity on their servers and communication lines within the next 12 months. When this happens, the managers predict that they will experience significant service 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 servers and high speed access lines and lock in those low rates for two years, The incremental cost of doubling the IT group's capacity is to raise its hardware lease cost and access line cost by 20 percent. IT currently spends $18,000 a month on hardware leases and access lines. If it were to double its existing capacity, the total monthly cost would rise to $21,600. Mr. Coronas believes his existing IT personnel can handle the additional server and line capacity. Coronas and the three division managers recommend that WWWeb acquire the additional capacity and lock in these attractive rates.
Required:
a. Analyze WWWeb's current policy of how the three divisions are charged for IT costs and whether WWWeb should acquire the additional capacity.
b. Should WWWeb change its policy of how it charges IT cost to the division? If so, what changes would you recommend.