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Chapter 22: Problem 4

Name three benefits and two costs of decentralization.

Short Answer

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Benefit 1: Decentralization increases autonomy by allowing local or regional leaders to make decisions, which can result in more efficient decision-making due to their better insight into local issues. Benefit 2: Decentralization enhances responsiveness, as local or regional leaders can quickly respond to the needs and preferences of their constituents, providing rapid decisions that directly benefit their communities. Benefit 3: Decentralization promotes innovation by allowing regional or local governments to implement new ideas and practices without needing approval from a central authority, leading to the development of tailored solutions for various communities. Cost 1: Decentralization can result in inefficient resource allocation, with imbalances in resource distribution due to the lack of a national perspective, leading to some areas being underfunded while others receive excess resources. Cost 2: Decentralization can lead to duplication of efforts between regional or local entities, resulting in higher overall costs due to the lack of coordination and communication between these governing bodies.

Step by step solution

01

Benefit 1: Increased Autonomy

Decentralization allows for decision-making authority to be delegated to local or regional levels, rather than all decisions being made by a central authority. This increased autonomy can result in more efficient decision-making, as local leaders may have better insight into the unique issues affecting their specific region.
02

Benefit 2: Enhanced Responsiveness

Decentralization may lead to enhanced responsiveness, since local or regional leaders will be more likely to respond to the needs and preferences of their constituents. Centralized governments can often be slow to react, especially to localized issues. In a decentralized system, local governments can make rapid decisions that directly benefit their communities.
03

Benefit 3: Promotes Innovation

Decentralization encourages innovation by allowing regional or local governments to implement new ideas and practices without needing approval from a central authority. This increased flexibility can lead to the development of unique and tailored solutions for various communities, which may be more effective than a "one size fits all" approach from a central government.
04

Cost 1: Inefficient Resource Allocation

One potential cost of decentralization is the risk of inefficient resource allocation. Because resources are being used at the regional or local level, there may not be a broad, national perspective on where resources are most needed. This can lead to imbalances in resource distribution, resulting in some areas receiving an excess of resources while others may be left underfunded.
05

Cost 2: Duplication of Efforts

Decentralization can also lead to duplication of efforts between various regional or local entities. As each smaller governing body becomes responsible for their own initiatives, there is a potential for overlap in actions or policies. This can result in higher overall costs due to the lack of coordination and communication between these individual governing bodies.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Benefits of Decentralization
Decentralization offers several important benefits in organizational structures and governments. One key advantage is increased autonomy. When authority is delegated to local or regional levels, leaders at these levels can make timely and relevant decisions. They have a closer understanding of their regional specifics, which can significantly enhance the quality of decision-making.
Another benefit is the enhanced responsiveness gained through decentralization. Local leaders, who are more attuned to the needs and preferences of their communities, can act swiftly and effectively. This is especially crucial because a centralized authority can often be sluggish in addressing localized issues.
Decentralization also promotes innovation. Without the constraints of a central authority's approval, local and regional leaders can experiment with new ideas and practices that are tailored to the needs of their communities. This can lead to more creative and effective solutions that a one-size-fits-all central plan might not achieve.
Costs of Decentralization
While decentralization offers various benefits, it also comes with certain costs. A significant concern is inefficient resource allocation. When resources are distributed at a local level, there can be a lack of overall coordination needed to allocate resources effectively across all regions. This might result in some areas having more than enough resources, while others remain underfunded.
Another cost is the potential for duplication of efforts. Decentralized structures can lead to multiple local entities inadvertently working on similar projects or initiatives without proper communication or coordination. This overlap can increase overall costs, wasting time and resources that could be more efficiently used through collaborative planning and management.
Decision-Making in Organizations
Decentralization greatly influences decision-making within organizations. In decentralized structures, decision-making is pushed down to lower levels. This empowerment allows individuals who are closer to the problem鈥攐r those who face it daily鈥攖o make decisions. This can lead to quicker and more effective solutions.
The decision-making process becomes more dynamic as it incorporates the diverse perspectives of local leaders or teams. This can result in more innovative and suitable strategies tailored to local conditions. However, it's important to ensure that these decisions are aligned with the organization's overall objectives to maintain coherence across the board.
Resource Allocation Challenges
Resource allocation is one of the trickiest challenges in decentralized systems. Without a central body to oversee the distribution, regions must determine their own resource needs and manage them effectively. However, this can lead to uneven distribution, with some areas receiving more resources than necessary and others getting insufficient support.
To mitigate these challenges, decentralized organizations need effective communication channels and systematic procedures for resource sharing and allocation. Coordination across different areas is vital. This ensures resources are allocated based on strategic priorities and actual needs, reducing waste and improving efficiencies.

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Most popular questions from this chapter

The Burton Company manufactures chainsaws at its plant in Sandusky, Ohio. The company has marketing divisions throughout the world. A Burton marketing division in Lille, France, imports 200,000 chainsaws annually from the United States. The following information is available: Suppose the United States and French tax authorities only allow transfer prices that are between the full manufacturing cost per unit of 175 dollar and a market price of 250 dollar, based on comparable imports into France. The French import duty is charged on the price at which the product is transferred into France. Any import duty paid to the French authorities is a deductible expense for calculating French income taxes. 1\. Calculate the after-tax operating income earned by the United States and French divisions from transferring 200,000 chainsaws (a) at full manufacturing cost per unit and (b) at market price of comparable imports. (Income taxes are not included in the computation of the cost-based transfer prices. 2\. Which transfer price should the Burton Company select to minimize the total of company import duties and income taxes? Remember that the transfer price must be between the full manufacturing cost per unit of 175 dollar and the market price of 250 dollar of comparable imports into France. Explain your reasoning.

Ballantine Corp. produces and sells lead crystal glassware. The firm consists of two divisions, Commercial and Specialty. The Commercial division manufactures 300,000 glasses per year. It incurs variable manufacturing costs of 8 dollar per unit and annual fixed manufacturing costs of 900,000 dollar. The Commercial division sells 100,000 units externally at a price of 12 dollar each, mostly to department stores. It transfers the remaining 200,000 units internally to the Specialty division, which modifies the units, adds an etched design, and sells them directly to consumers online. Ballantine Corp. has adopted a market-based transfer-pricing policy. For each glass it receives from the Commercial division, the Specialty division pays the weighted-average external price the Commercial division charges its customers outside the company. The current transfer price is accordingly set at 12 dollar. Eileen McCarthy, the manager of the Commercial division, receives an offer from Home D茅cor, a chain of upscale home furnishings stores. Home D茅cor offers to buy 20,000 glasses at a price of 9 dollar each, knowing that the entire lead crystal industry (including Ballantine Corp.) has excess capacity at this time. The variable manufacturing cost to the Commercial division for the units Home D茅cor is requesting is 8 dollar, and there are no additional costs associated with this offer. Accepting Home D茅cor's offer would not affect the current price of 12 dollar charged to existing external customers. 1\. Calculate the Commercial division's current annual level of profit (without the new order). 2\. Compute the change in the Commercial division's profit if it accepts Home D茅cor's offer. Will Eileen McCarthy accept this offer if her aim is to maximize the Commercial division's profit? 3\. Would the top management of Ballantine Corp. want the Commercial division to accept the offer? Compute the change in firm-wide profit associated with Home D茅cor's offer.

"Under the general guideline for transfer pricing, the minimum transfer price will vary depending on whether the supplying division has unused capacity or not." Do you agree? Explain.

The Slate Company manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of 65 dollar per screen. The SD can sell all its output to the outside market at a price of 100 dollar per screen, after incurring a variable marketing and distribution cost of 8 dollar per screen. If the \(A D\) purchases screens from outside suppliers at a price of 100 dollar per screen, it will incur a variable purchasing cost of 7 dollar per screen. Slate's division managers can act autonomously to maximize their own division's operating income. 1\. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? 2\. What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? 3\. Now suppose that the SD can sell only \(70 \%\) of its output capacity of 20,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than \(20,000 \mathrm{TV}\) sets per month. a. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? b. From the point of view of Slate's management, how much of the SD output should be transferred to the AD? c. If Slate mandates the SD and AD managers to "split the difference" on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement \(3 b ?\)

The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division's output both to outsiders and to other divisions of Kelly- Elias. Division \(C\) has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division \(A\) is increasing its selling price to 135 dollar, division C's manager decides to purchase the engine component from external suppliers. Division \(C\) can purchase the component for 115 dollar per unit in the open market. Division \(A\) insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A's manager appeals to top management of Kelly-Elias for support in the dispute with division \(\mathrm{C}\) and supplies the following operating data: 1\. Assume that there are no alternative uses for internal facilities of division A. Determine whether the company as a whole will benefit if division \(C\) purchases the component from external suppliers for 115 dollar per unit. What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are also in the best interest of the company as a whole? 2\. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,900 units for division \(\mathrm{C}\), division A's equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of 22,800 dollar. Should division \(C\) purchase from external suppliers? Show your computations. 3\. Assume that there are no alternative uses for division A's internal facilities and that the price from outsiders drops 15 dollar. Should division \(C\) purchase from external suppliers? What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are also in the best interest of the company as a whole?
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