General Motors has three auto divisions (1, 2, and 3). It also has an accounting division and a management consultingdivision. The question is: What fraction of the cost of the accounting and management consulting divisions should be allocatedto each auto division? We assume that the entire cost of the accounting and management consulting departments must beallocated to the three auto divisions. During a given year, the work of the accounting division and management consultingdivision is allocated as shown in Table 4.For example, accounting spends 10% of its time on problems generated by the accounting department, 20% of its time onwork generated by division 3, and so forth. Each year, it costs $63 million to run the accounting department and $210 millionto run the management consulting department. What fraction of these costs should be allocated to each auto division? Thinkof $1 in costs incurred in accounting work. There is a .20 chance that this dollar should be allocated to each auto division, a.30 chance it should be allocated to consulting, and a .10 chance to accounting. If the dollar is allocated to an auto division,we know which division should be charged for that dollar. If the dollar is charged to consulting (for example), we repeat theprocess until the dollar is eventually charged to an auto division. Use knowledge of absorbing chains to figure out how toallocate the costs of running the accounting and management consulting departments among the three auto divisions.
General Motors has three auto divisions (1, 2, and 3). It also has an accounting division and a management consulting
division. The question is: What fraction of the cost of the
to each auto division? We assume that the entire cost of the accounting and management consulting departments must be
allocated to the three auto divisions. During a given year, the work of the accounting division and management consulting
division is allocated as shown in Table 4.
For example, accounting spends 10% of its time on problems generated by the accounting department, 20% of its time on
work generated by division 3, and so forth. Each year, it costs $63 million to run the accounting department and $210 million
to run the management consulting department. What fraction of these costs should be allocated to each auto division? Think
of $1 in costs incurred in accounting work. There is a .20 chance that this dollar should be allocated to each auto division, a
.30 chance it should be allocated to consulting, and a .10 chance to accounting. If the dollar is allocated to an auto division,
we know which division should be charged for that dollar. If the dollar is charged to consulting (for example), we repeat the
process until the dollar is eventually charged to an auto division. Use knowledge of absorbing chains to figure out how to
allocate the costs of running the accounting and management consulting departments among the three auto divisions.
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