(a)
Ethical case:
In this case out of the three departments Person B has no interest in plumbing department. B wants to reallocate the company’s fixed cost of other two divisions to the plumbing divisions in order to improve the income. But it does not create any changes thereby, the board of directors suggested to close the plumbing department.
To discuss: If a division is reporting losses, does that mean that it should be closed.
(b)
Fixed Cost:
It is a cost which is constant in the short run, it is not related to any change in the production of goods or service, it will be fixed disregarding of increase or decrease in output. Fixed cost is generally incurred on fixed assets in long run.
To explain: Reallocation of fixed costs across the division was unethical.
(c)
To explain: What Person B should do?
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MANAGERIAL ACCT.-WILEYPLUS BLKBRD PKG
- Bannister Company, an electronics firm, buys circuit boards and manually inserts various electronic devices into the printed circuit board. Bannister sells its products to original equipment manufacturers. Profits for the last two years have been less than expected. Mandy Confer, owner of Bannister, was convinced that her firm needed to adopt a revenue growth and cost reduction strategy to increase overall profits. After a careful review of her firms condition, Mandy realized that the main obstacle for increasing revenues and reducing costs was the high defect rate of her products (a 6 percent reject rate). She was certain that revenues would grow if the defect rate was reduced dramatically. Costs would also decline as there would be fewer rejects and less rework. By decreasing the defect rate, customer satisfaction would increase, causing, in turn, an increase in market share. Mandy also felt that the following actions were needed to help ensure the success of the revenue growth and cost reduction strategy: a. Improve the soldering capabilities by sending employees to an outside course. b. Redesign the insertion process to eliminate some of the common mistakes. c. Improve the procurement process by selecting suppliers that provide higher-quality circuit boards. Required: 1. State the revenue growth and cost reduction strategy using a series of cause-and-effect relationships expressed as if-then statements. 2. Illustrate the strategy using a strategy map. 3. Explain how the revenue growth strategy can be tested. In your explanation, discuss the role of lead and lag measures, targets, and double-loop feedback.arrow_forwardCost Information and Ethical Behavior, Service Organization Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a 15,000 personal loan to pay offjust when his oldest son is starting college. Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first 2 years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit. Jean: Leroy, Im at a critical point in my business venture. If I can win the bid for the states advertising dollars, Ill be set. Winning the bid will bring 600,000 to 700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another 200,000 to 300,000 of new business. Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. Its a competitive business, though. As new as you are, I doubt that youll have much chance of winning. Jean: Youre forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governors campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work. Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, youll have to get support from Atlanta. You could take a lot of heat. Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that Im not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and Ill make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of 15,000. On top of that, Ill increase your annual salary by 20%. That should solve most of your financial difficulties. After all, we have been friends since day oneand what are friends for? Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide? Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firms bid. Required: 1. What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroys company would say about this situation? 2. What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?arrow_forwardSmart owns multiple Burger restaurants. After months of struggling, one of the restaurants just must be closed, Smart knows that this loss will already cause a decrease in his reported net earnings, he decides to go ahead and charge a majority of the company's expenses to this business unit shut down. This is an example of ………. in earning Managementarrow_forward
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- Karen Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy considering a recent scare she faced when RR’s corporate banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of credit not been renewed, RR would not have been able to make payroll, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR’s working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that reducing working capital can also add value to a company by improving its EVA (Economic Value Added). In her corporate finance course Johnson learned that EVA is calculated by taking net operating profit after taxes (NOPAT) and then…arrow_forwardKaren Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy considering a recent scare she faced when RR’s corporate banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of credit not been renewed, RR would not have been able to make payroll, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR’s working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that reducing working capital can also add value to a company by improving its EVA (Economic Value Added). In her corporate finance course Johnson learned that EVA is calculated by taking net operating profit after taxes (NOPAT) and then…arrow_forwardKaren Johnson, CFO for Raucous Roasters (RR), a specialty coffee manufacturer, is rethinking her company’s working capital policy considering a recent scare she faced when RR’s corporate banker, citing a nationwide credit crunch, balked at renewing RR’s line of credit. Had the line of credit not been renewed, RR would not have been able to make payroll, potentially forcing the company out of business. Although the line of credit was ultimately renewed, the scare has forced Johnson to examine carefully each component of RR’s working capital to make sure it is needed, with the goal of determining whether the line of credit can be eliminated entirely. In addition to (possibly) freeing RR from the need for a line of credit, Johnson is well aware that reducing working capital can also add value to a company by improving its EVA (Economic Value Added). In her corporate finance course Johnson learned that EVA is calculated by taking net operating profit after taxes (NOPAT) and then…arrow_forward
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