Textbook Problem

Make or Buy: Ethical Considerations

Pamela McDonald, chief management accountant and controller for Murray Manufacturing Inc., was having lunch with Roger Branch, manager of the company’s power department. Over the past 6 months, Pamela and Roger had developed a romantic relationship and were making plans for marriage. To keep company gossip at a minimum, Pamela and Roger had kept the relationship very quiet, and no one in the company was aware of it. The topic of the luncheon conversation centered on a decision concerning the company’s power department that Larry Johnson, president of the company, was about to make.

Pamela: Roger, in our last executive meeting, we were told that a local utility company offered to supply power and quoted a price per kilowatt-hour that they said would hold for the next 3 years. They even offered to enter into a contractual agreement with us.

Roger: This is news to me. Is the bid price a threat to my area? Can they sell us power cheaper than we make it? And why wasn’t I informed about this matter? I should have some input. This burns me. I think I should give Larry a call this afternoon and lodge a strong complaint.

Pamela: Calm down, Roger. The last thing I want you to do is call Larry. Larry made us all promise to keep this whole deal quiet until a decision had been made. He did not want you involved because he wanted to make an unbiased decision. You know that the company is struggling somewhat, and they are looking for ways to save money.

Roger: Yeah, but at my expense? And at the expense of my department’s workers? At my age, I doubt that I could find a job that pays as well and has the same benefits. How much of a threat is this offer?

Pamela: Jack Lacy, my assistant controller, prepared an analysis while I was on vacation. It showed that internal production is cheaper than buying, but not by much. Larry asked me to review the findings and submit a final recommendation for next Wednesday’s meeting. I’ve reviewed Jack’s analysis, and it’s faulty. He overlooked the interactions of your department with other service departments. When these are considered, the analysis is overwhelmingly in favor of purchasing the power. The savings are about $300,000 per year.

Roger: If Larry hears that, my department’s gone. Pam, you can’t let this happen. I’m 3 years away from having a vested retirement. And my workers—they have home mortgages, kids in college, families to support. No, it’s not right. Pam, just tell him that your assistant’s analysis is on target. He’ll never know the difference.

Pamela: Roger, what you’re suggesting doesn’t sound right either. Would it be ethical for me to fail to disclose this information?

Roger: Ethical? Do you think it’s right to lay off employees that have been loyal, faithful workers simply to fatten the pockets of the owners of this company? The Murrays already are so rich that they don’t know what to do with their money. I think that it’s even more unethical to penalize me and my workers. Why should we have to bear the consequences of some bad marketing decisions? Anyway, the effects of those decisions are about gone, and the company should be back to normal within a year or so.

Pamela: You may be right. Perhaps the well-being of you and your workers is more important than saving $300,000 for the Murrays.

Required:

1. 1. Should Pamela have told Roger about the impending decision concerning the power department? What do you think most corporate codes of ethics would say about this?
2. 2. Should Pamela provide Larry with the correct data concerning the power department? Or should she protect its workers? What would you do if you were Pamela?