Can somene please reply with a complete and well thought out response for each q
ID: 2499947 • Letter: C
Question
Can somene please reply with a complete and well thought out response for each question of this sample case study , preferably a paragragh each? Thank you.
The Case Situation
Ryan sat at his desk reviewing the latest budget supporting schedules. He had only recently been hired as the Chief Accountant and was determined to learn all the details of this manufacturing firm. The firm was relatively small and straight forward; it manufactured a single product and wholesaled it to retail outlets, which in turn sold it to end consumers.
Ryan raised his head in response to the raps on his office door frame. He recognized Sid, the Vice President of Sales, and waved him in through the already open door.
“Hi Sid. What can I do for you?” Ryan queried.
Sid responded. “I have a problem, but I also think I have a solution. Can I talk to you about it?”
“Sure.” said Ryan.
Sid began. “Ryan, you know what the economy has been like. It’s getting harder to keep sales up, let alone increase sales. Our competitors are under-pricing us and unless I can give the retailer some price discount, I’m not sure I will be able to meet our sales projection. Now, I’m not an accountant and I’m not sure I understand all the details, but, let me try to explain my understanding of the situation. You said in a recent budget meeting that we have to have a positive contribution margin, that is, the selling price has to be greater than the variable costs of production. Otherwise, we will not be generating any profits to offset our fixed production costs. As I understand it, the contribution margin from each unit we sell gradually eats away at the fixed costs until we have sold enough units to completely cover our fixed costs. You called that the ‘break-even point’. From that point on, the contribution margin from each unit sold adds to profits. Do I have that correct?”
Ryan responded. “In a nutshell, you’ve got the concept right.”
Sid continued. “Ok. Here’s the problem. Based on your briefing in the budget meeting, the CEO said that we MUST have a contribution margin of $2.00 per unit in order to achieve our desired pre-tax profit of $85,000, and I have to sell 200,000 units. I’m not sure I can sell 200,000 units. And if I can’t pay good commissions to my salespeople I stand a chance of losing some of my best salespeople. Here’s Figure 1, the handout you gave us at the budget meeting. It shows that because variable costs are $4.00, to get a contribution margin of $2.00, we have to sell each unit for $6.00. The problem is that we are being undercut by our competitors. They are giving discounts to the retailers and selling their versions of our product for less than $6.00.”
Sid added. “I can’t reduce our price unless we can reduce our variable costs or our fixed costs. If we reduce our variable costs, then a $2.00 contribution margin can be achieved at a lower selling price. If we can reduce our fixed costs, then we can reach our desired pre-tax profit with a lower selling price.”
“But,” Ryan interjected, “if you remember from the budget meeting, I also said that in the short-term we can’t appreciably change our cost structure. That’s a long-term solution.”
“I know. I know.” said Sid. “But, I’ve been thinking about this. Right now, as was shown in your Figure 1 (Appendix), maintenance on the machines is budgeted as a variable cost of 60¢ per unit and the maintenance is repeatedly scheduled after a fixed number of units of our product are manufactured. Quality testing on a sample of our products is also budgeted as a variable cost of 10¢ per unit. Shoot! We’ve been making this product so long that virtually every unit is ok. Take my word for it, only a very small number of units ever fails quality testing that results in the machines having to be re-tuned. According to your numbers, if we produce and sell 200,000 units, total maintenance costs will be $120,000 and total quality testing costs will be $20,000.”
“Those numbers are correct.” said Ryan.
Sid continued. “What if you turned maintenance and quality testing into fixed costs and took them out of variable costs? The budgets for those two departments wouldn’t change; they would just become fixed costs. We won’t schedule maintenance after a fixed number of units are manufactured, we would simply schedule maintenance after a unit of time has passed, for example every two weeks. Same with quality testing. Instead of testing one in every 50 units, we would just take a fixed sample of units every week and quality test them. In this way the budgets of those two departments would be fixed and not based on the level of production.”
Sid got even more animated. “Here look at what I prepared. In this hypothetical illustration, that I labeled Figure 2 (Appendix), I think I have the solution. By moving maintenance and quality testing to the fixed costs, we lower the variable costs per unit from $4.00 down to $3.30. This means that I can offer discounts to the retail outlets and sell our product to them for $5.30. We can still satisfy the CEO because the contribution margin stays at $2.00 per unit. Sure the break-even point goes up, but because of the lower selling price, I can actually sell more units … I project as much as 275,000 units. At this number of units being sold, the overall pre-tax profits will increase to $95,000. This will also increase sales commissions to my salespeople and I can keep them from leaving. THIS IS A WIN, WIN SITUATION!”
Ryan raised a question. “What about the managers of maintenance and quality testing? Might they not raise a stink?”
Sid retorted. “Don’t worry about them. I’ve been here longer than you and I know them both very well. Their overall budget remains the same and I can talk them into it, especially when I tell them that the Chief Accountant agrees with the plan. Besides, it will actually reduce their workload to keep a fixed schedule rather than having to schedule their work around how many units we produce. I’ll take care of it. All you have to do is rearrange the numbers and reduce variable costs.”
“But,” Ryan interjected, “what about the factory? Won’t the Vice President of Manufacturing need to know that more units are going to have to be made? After all he needs to order more materials and make work schedules. Shouldn’t I make a new cost budget, like Figure 2, for everyone?”
“Not a problem.” said Sid. “I will let the VP of Manufacturing know that I expect more sales and he will have to make another 75,000 units. He will be more than excited about that. We won’t need a new cost budget, because we aren’t changing anyone’s budget except for manufacturing. And they always respond to additional orders whenever my people sell more. In fact, they expect things like that to happen. If I were you I wouldn’t worry about changing and distributing the budget. Besides, the CEO is really going to be pleasantly surprised when at year-end we show him the great results we got.”
The Case Requirements
If you were Ryan, what should you do? In framing your analysis, address the following six requirements.
1.Based on the VP of Sales’ proposal, what is being asked of Ryan, the Chief Accountant? When answering this question, ask yourself what you know about the Chief Accountant, the VP of Sales, their goals and the nature of their relationship? What are the goals of the organization?
2.Who are the stakeholders that will be affected by how Ryan responds to the VP of Sales proposal? Describe how the request might affect each of the stakeholders? What is Ryan’s responsibility to each stakeholder? When answering this question, think about the people and organizational positions specifically identified in the case and think beyond those to people or organizations not specifically mentioned.
3.Put yourself in Ryan’s position. Just like Ryan, you do not know much about this firm. What would you research about how this organization is “run”? Are the budgets and measures of success appropriate within this firm? What would you need to find out about the ethical culture of the firm, the procedures, the policies, and the management decision making relationships that you would have to know in order to make a good decision about the VP of Sales’ request?
4.Discuss the professional standards the Chief Accountant should consider in deciding how to handle the VP of Sales’ request. Think about the specific professional standards itemized in the IMA’s Statement of Professional Ethical Practice.[1] Which standards apply to Ryan in this situation?
5.Identify the Chief Accountant’s alternative options for responding to the VP of Sales’ proposal. Discuss the possible consequences and the organizational factors and professional standards applicable to each option. When answering this question, consider that Ryan could do any one of many different things, such as, agree, disagree, remain unsure of how he should respond to the proposal, etc. How should Ryan proceed under each alternative option? The case is not explicit about what corporate guidance exists to resolve ethical dilemmas, so you may have to consider hypothetical alternatives.
6.Which of the options would you recommend to the Chief Accountant? Explain your reasoning for selecting that option. Discuss your recommended course of action with respect to resolving the ethical dilemma and the effect on the Chief Accountant. You should clearly outline and discuss your recommendation for Ryan’s course of action. The course of action should go beyond the limited and specific actions indicated by the IMA’s Statement of Ethical Professional Practice and should consider: (1) preserving good working relations within the organization; (2) how to improve the organization; (3) how to reduce ethical dilemmas in the future, and; (4) how to improve Ryan’s image within the organization by how he handles this issue.
Explanation / Answer
Answer:1 Students should recognize that the VP of Sales is attempting to take advantage of the Chief Accountant’s lack of experience with the organization. He is focused on meeting his personal goals and those of his department. While he appears to propose actions that benefit the company and the stakeholders, he is essentially asking the Chief Accountant to make changes to how costs are accounted for. Neither man is authorized to make these changes which could have far-reaching negative effects on the organization. The VP of Sales has not fully considered the organizational consequences and the Chief Accountant’s professional reputation.
Answer:2 When answering this question, think about the people and organizational positions specifically identified in the case and think beyond those to people or organizations not specifically mentioned.” Students should structure their response according to the stakeholder’s position and responsibilities and from the perspective of encouraging others to comply with the same ethical principles that apply to professional accountants. At a minimum, they should discuss the VP of Sales, the maintenance and quality control managers, the VP of Manufacturing, and the CEO. A complete response would include customers, other employees, and stockholders as other affected stakeholders.
• VP of Sales. Ryan should recognize that the VP of Sales’ proposal is motivated by self-interest that will result in sub-unit optimization as opposed to system-wide improvements. The VP of Sales feels pressure to meet sales goals and retain his top salespeople. Ryan should consider whether the loss of salespeople is a real threat, the underlying causes, and what pressures exist in the market. He should examine practices within the firm that may inadvertently pressure Sid to manipulate costs to achieve his objectives. Considering these issues can help Ryan structure a response that is both ethical and effective at addressing the issue and that may encourage Sid to find more ethical solutions to problems in the future.
• Maintenance Department Manager. This manager is responsible to keep equipment operating within specification to avoid work outages and defective units. He is responsible to meet this objective within budget. Increased production will further burden the machines,his staff, and cost more. Making the proposed change will ease maintenance scheduling and, his costs won’t change, but it may jeopardize his primary objectives. Ryan must consider how the department’s performance is measured to ensure that the department manager has the proper incentives to act ethically. He should encourage the manager to fully disclose the effect of the proposed change on the defect rate, and the life and reliability of the equipment.
• Quality Control Manager. This manager is responsible to assess and report the quality control results. He should determine what preventive and appraisal measures and systems are needed to satisfy the firm’s quality objectives. These include the nature and timing of maintenance and inspections. Making the proposed change may hinder him from achieving his objectives. The company’s reputation and market share may suffer. Ryan must understand that any changes to policies that affect quality should include substantial input from this manager. Ryan should also examine how the manager’s performance is measured to ensure that the manager’s incentives are aligned with the company’s quality objectives.
• VP of Manufacturing. This manager is responsible for timely production within company specifications. He must schedule and supply inputs to production (material and labor) and use other capital to meet production targets. He needs accurate projections, trained workers,and reliable equipment. Ryan must recognize that his decision impacts all of these things. Ryan’s failure to obtain this manager’s input, to provide updated budgets, and to change policies that impact the manager’s ability to do his job have operational and ethical impacts.
• CEO. The CEO is ultimately responsible for the firm’s performance including financial performance, operational performance, and corporate moral and legal conduct. The CEO sets the tone for ethical conduct by defining it, acting ethically, and providing the proper incentives for employees to act ethically. There were “clues” in the case narrative that implied some practices that would not motivate ethical behavior. Students should briefly discuss these issues. First, the CEO defined contribution margin per unit as a required objective. That objective, in and of itself, was the primary motivation for the VP of Sales to suggest the change. Had the objective been the profit itself, then the VP would not have focused on restructuring costs and may have devised a way to achieve the profit objective in a more ethical manner. Second, if each manager is focused on his own departmental budget to the detriment of the company performance, it implies that the incentive system is misaligned. Third, if managers are used to activity that differs significantly from budget, then the budgets are not accurate and there may be budgetary slack issues. Fourth, if the quality control and maintenance managers are only concerned about their budgets and not about the actual defect rate as the VP of Sales indicates, then the firm may not be measuring and rewarding employees for the operational measures that drive the desired results. If Ryan considers these issues and the effect of the culture on employee conduct, it would help him assess the motives and responses of the managers to the problem.
•Other Stakeholders. If the proposed change is made, customers will pay less but the chance of defective products increases. Increased production demands may result in delivery delays,which will reduce customer satisfaction. If Ryan supports the change, he must know that there is a chance of increased quality issues. Other employees in the firm may also be adversely impacted by declining customer satisfaction, increasing defective units, and increasing long-term costs related to greater demands and less maintenance on equipment. Finally, stockholders may gain in the short-term but lose out in the long-term.
Answer:3 Ryan’s position as Chief Accountant includes ethical responsibilities to both his employer and the accounting profession. Students should address both perspectives. Some students may also identify personal ethical considerations. From the organizational perspective, Ryan is obligated to comply with established procedures and protect the firm’s overall interests. First, since Ryan is new to the company, he should investigate if the firm has a code of conduct. Reviewing the conduct code will help him assess the culture and guide him toward the best course of action. Second, Ryan needs to research the firm’s procedures regarding maintenance and quality control. Sid’s proposal requires changes to operational procedures for maintenance and quality control. The changes may increase quality issues and impact the firm’s future image and market share. Third, Ryan should research procedures regarding budgeting. The VP of Sales says Ryan does not need to prepare a new budget because manufacturing expects and responds to increases in production. This implies a problem with budgetary slack. The VP of Sales tells Ryan that maintenance and quality control will not care if the change is made as long as their budgets don’t change. This implies asuboptimal focus on departmental costs, reflecting an exclusive financial measure with inattention to other nonfinancial performance measures (e.g., defects and returns). Ryan should also determine what his obligation is with respect to preparation of budgets. Is it the firm’s practice to update budgets to reflect changes? Fourth, Ryan needs to research the reporting structure and working relationships between departments in determining how to respond. At a minimum, he should find out with whom he should consult and communicate in both the consideration and resolution of the problem.
A well-thought-out response will also discuss focusing on contribution margin per unit and how that focus provides an incentive for inappropriate conduct to achieve organizational objectives. In achieving organizational objectives , Ryan should also be concerned with how those objectives are achieved and the related consequences thereof.
Answer:4 Professionally, Ryan should consider his obligation as a professional accountant to be honest, fair, objective, and responsible and to encourage others in the organization to do the same. Specific standards are:
• Integrity. Ryan is obligated to communicate with all parties impacted by the problem and/or the proposed solution. The VP of Sales proposes a solution that benefits sales more than any other department or the firm as a whole and that may actually be to the firm’s detriment. Under Sid’s proposal, sales revenue increases 21.5%, pre-tax profits increase 11.8%, and sales commissions increase a whopping 37.5%. Sid would accomplish both of his objectives to make his sales goal and to retain his top sales people by giving them higher commissions. However, maintenance and quality control managers may suffer as quality falls, and manufacturing must respond to unanticipated increased demand. If Ryan relies on Sid to communicate with the other departments and managers, he violates the standard that requires him to regularly communicate to avoid the appearance of a conflict of interest. By supporting Sid’s proposal, he supports a proposal that particularly benefits one individual over the firm, which certainly gives the appearance of a conflict of interest.
• Credibility. By rearranging the numbers and not creating a replacement cost budget, Ryan violates the credibility standard by not disclosing relevant information to others in the organization. Making maintenance and quality control costs fixed costs may not be a fair and objective portrayal of the costs. Ryan should request a budget meeting to discuss Sid’s proposal so that all affected parties could have in put into the decision. Ryan should also create a new budget after the meeting, if it is decided to alter any aspect of the budget.
Answer:5 When answering this question, consider that Ryan could do any one of many different things, such as, agree, disagree, remain unsure of how he should respond to the proposal, etc. How should Ryan proceed under each alternative option? The case is not explicit about what corporate guidance exists to resolve ethical dilemmas, so you may have to consider hypothetical alternatives.” Ryan could disagree with the plan, he could unilaterall agree to the plan, he could consider the plan in consultation with all internal stakeholders, or he could suggest an alternative plan. If Ryan agrees with the plan and does what the VP of Sales requests, he should be able to defend his actions to his superiors and to other affected stakeholders. This option could result in Ryan losing his position, especially if he does not consult with his superiors. If Ryan disagrees with the plan, he needs to discuss his decision with the VP of Sales to minimize harm to their professional relationship. He needs to explain his reasoning in a professional manner to educate the VP of Sales on ethical behavior in the accounting profession. If Ryan develops an alternative plan to help the VP of Sales accomplish his objectives while properly accounting for costs, this would allow Ryan to develop a good relationship with the VP of Sales and show his value to the company as a competent accountant and a team player . This option would require Ryan to talk with his superiors and other stakeholders, especially given his short time with the company. If he determines that the request is unethical and is unsure how to proceed, he should first consult the company’s policy on resolution of ethical conflicts. If no policy exists, Ryan should discuss the issue with his immediate supervisor. He could also confidentially discuss the issue with an impartial advisor (IMA Ethics Counselor or attorney) to better understand his options.
Answer:6 “I would not do what the VP of sales proposed. Instead, I would work with him to find other, more ethical solutions to the problem. I would involve other managers and my immediate superior or at least fully communicate as things transpired. This would protect me personally by ensuring that I do not violate firm policies or off end people with whom I must work. I would not unnecessarily disclose the VP of sale’s proposal. I would first discuss it with him to explain why I do not agree with it, why I feel it is unethical, and finish with a willingness to help solve the problem. This would show him that the proposal was unethical, why, and help him think about ethical ways to solve the problem. This shouldn’t make an enemy of him if the discussion is tactful and I empathize with him about the pressures he faces in his job. This decision is consistent with my professional ethical principles.Also, it protects the firm by considering all aspects of the issue and reducing negative impacts on the company. I would focus on the objective of obtaining profit and retaining key personnel (rather than meeting a contribution margin per unit goal). This requires discussing information related to the market, pricing, competitors, employee morale, quality initiatives,and results. I would focus on differentiating the product, real or imagined, and/or ways to reduce costs from efficiencies rather than manipulation of numbers. Finally, I would review the performance measurement system used by the firm to achieve strategic objectives and review ethical codes of conduct and policies employed by the firm to motivate desired behavior. Possible consequences of my actions could be positive or negative. Poor handing by me could make an enemy of the VP of Sales. I could get a negative performance appraisal if my immediate superior feels that I handled the situation poorly, or if I inadvertently insulted him when discussing the firm’s policies and incentives that led to the problem. Conversely, I could be praised for my accurate assessment of the underlying causes of the problem, a long-term solution, and improvements to the firm’s ethical culture.”
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