Matt Mouw is in charge of providing computing and other information technology services to his firm. Matt’s firm has four distinct product lines, each operated as a stand-alone business. Profit is the primary criterion for evaluating product-line managers, and the entire firm has a competitive culture that takes pride in meeting tight targets. Support department managers, such as Matt, are expected to allocate their costs to their internal customers and break even.
Matt has identified a new software product that would help all four product lines improve their data storage, analysis, and reporting. The product would bring considerable standardization to Matt’s department as well and allow him to provide more effective and efficient customer service. The product will cost $750,000 plus a license fee for each user. The managers of product lines A and B, the two largest products, have expressed considerable interest in installing the system. The existing software package has become obsolete, and the divisions see the new software as increasing their competitive edge. The manager of product line C indicates that a number of other initiatives are underway. She will be able to indicate interest, or lack thereof, only after a period of six months or so. The manager of product line D wants to wait for another year because his division is too small to take a gamble. He wants to see how things go with the “big boys” before committing the human and other resources needed to roll out the new system.

Required:
a. What is the purpose of allocating the cost of the new software product to the users? In particular, should the firm allocate the acquisition cost to the four product lines?
b. Assume that the firm has decided to allocate the software cost. List two different ways the firm could allocate the software cost to the product divisions. What are the costs and benefits of each method?
c. Suppose that the software cost was allocated to Divisions A and B alone because they are the only immediate users. Six months later, Division C wants to implement the software as well. The division manager for C argues that the acquisition cost is now sunk, meaning that none of it should be allocated to her division. Evaluate the merits of this argument.