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?
Managerial accouting H.W. problem, help please :)?amc theater
1. since the bonuses are based on earnings what are the issues involved w/ implementing the discount?
The persons whose bonuses are decided by earnings should not be the sole persons to decide on sales strategy and pricing. Someone else should be tasked with assessing the viability of the proposed strategy.
2. what are the implications of the actions for the company’s long term success?
Once the customers know you will give this sort of discount, they may not buy your products in future when there is no discount and sales may suffer in the long run.
3. is robin correct in asserting that increasing the inventory will increase net income and why?
He is correct because costing methods spread the cost of manufacturing over the no. of units manufactured. Variable costs won't make a difference but fixed costs will be absorbed into the units produced. If you have a lot of ending inventory at year-end, the fixed costs get carried into the next year via the ending inventory, thereby lowering the current year's COGS.
4. are the actions proposed by Ed and Robin ethical or unethical and explain why?
They're not ethical cos they've put their own interests before those of the company's.
Managerial accouting H.W. problem, help please :)?concerts opera theater
god its was probably harder to type in the question than i would be to awnser it.. good luck
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