In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations?

This can be due to the method of allocating cost.

Explanation:

In the given scenario a division in a decentralised company earned the largest amount of income from operations, yet it was the least profitable.

This can be as a result of the cost allocation method the company uses.

If the company uses a cost allocation method where cost from other division is paid for by the division with largest income. The result will be that the other divisions that generate less income will appear to be more profitable.

The remedy for this is to use activity based costing. Where cost is allocated based on the level of activity of a division.

That way divisions will only pay for cost associated with their activity

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