I need help with my managerial accouting hw problem?

Scenario: Medical tech inc. a public company w/ sales last yr over 700 mill., produces a wide variety of advanced med equipment, both stock items and custom equipment. They sell to both docs and hospitals.

By the end of 3rd quarter of 2007, it was clear to Ed Walters (chief oper. Officer) and Robin Smith (CFO) that the company was short of annual earnings target set by BOD. Ed and robin receive annual bonuses based on meeting that target. Although in recent yrs the bonuses averaged 40% of their total compensation, it was clear there would be no bonus this yr if business didn’t improve markedly in the 4th quarter. They devised the following strategy.

Ed sugguested they take unprecedented step of offering 25% discount on all products ordered in oct and nov for dec delivery. Robin agreed that would boost sales in 4th quarter. However, it would come at the expense of first quarter sales in 2008 and total sales for 2 quarters were likely to be unchanged. However, since their bonuses for this yr will be based on 2007 earnings, they decided to take the action.

Robin suggested another action, “increase production of our stock items in the 4th quarter. With the high priced production equipment, we have high fixed production costs. The more items we produce, the more of the fixed costs will be deferred in inventory.”

Ed agreed to get marketing working on sales promotion and Robin would update the production schedule to increase fourth quarter output. Ed concluded the discussion with the comment that, “this might be our best bonus ever!”

Discuss both ethical and accounting issues considering 1. since the bonuses are based on earnings what are the issues involved w/ implementing the discount, 2. what are the implications of the actions for the company’s long term success, 3. is robin correct in asserting that increasing the inventory will increase net income and why 4. are the actions proposed by Ed and Robin ethical or unethical and explain why?

I need help with my managerial accouting hw problem?chinese theater

I consider the actions of Ed and Robin to be akin to embezzlement, since they are manipulating the company system to get them revenue that they would not be entitled too without the manipulation.

A lot of companies have sales that spike close to the end of the month, end of year, end of quarter.

This can be do to unethical games played by people whose bonuses are based on sales in a given time frame, and also by managers whose performance is measured by some metrics that do not look at the big picture.

If the bonuses are based on earnings, then lowering the profits through discounts could mean losses instead of profits.

If the bonuses are based on sales, irrespective of whether they are profits or losses, then deliberately selling products at a loss can mean a boost to bonuses, and later the owners of the company will find it neccessary to change how the bonuses are computed.

Increasing inventory, that does not get sold, just means that more money is tied up in unsold inventory.

It is often true that making larger quantities of a product means lower unit cost of each, because there are fixed costs like electricity to light a building, and the cost of the building, that have to be averaged over all products made there ... so make more, less goes into each. But this is an effective ploy, only if the inventory gets sold.

Storage of unsold inventory also adds to the cost of the business ... storage space, that could be used for something else.