CF is the new controller for the consumer division of ABC company. In the past five years, ABC’s earnings have grown by at least 15% annually, with the consumer division’s earnings growing by over 20% annually over the same time-period. In the 4th quarter of the current year, however, it is projected that consumer’s income will grow by 8% and ABC’s will grow by 10%. ML, consumer division’s president, wants CF to take some of the following “end of the year” actions in order to improve consumer’s reported earnings. Under the previous controller, these types of actions were more or less taken as acceptable practices.
1) Deferring routine monthly maintenance on equipment by an outside vendor until January.
2) Extending the close of the fiscal year beyond December 31 so that some sales from next year are counted in the current fiscal year.
3) Altering dates on shipping documents so that sales made in January of the next year appear to have occurred in December of the current year.
4) Giving salespeople a double bonus to exceed December targets.
5) Reducing the number of December advertising spots and increasing the number to be run in January.
6) Deferring advertising costs by asking the outside advertising agency to delay sending out bills for December advertisements until January or by having the agency indicate that advertisements run in December were run in January.
7) Persuading customers to accept merchandise for shipment in December that they would normally not order until the following year.
a) Classify each of these possible actions as “acceptable” or “unacceptable” according to the IMA Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management. Be sure to justify / explain your classifications.
b) What should CF do if ML suggests that these actions are taken in every division of ABC and that the consumer division will be greatly harmed if its results are not portrayed in the it does not present “better” results than 8% growth?
Consider the following information, prepared based on a capacity of 40,000 units:
Category Cost per Unit
Variable manufacturing costs $5.00
Fixed manufacturing costs $1.50
Variable marketing costs $1.00
Fixed marketing costs $0.50
Capacity cannot be added in the short run and the firm currently sells the product for $10 per unit.
Consider each of these scenarios independent of each other.
a) The company is currently producing 30,000 units per month. A potential customer has contacted the firm and offered to purchase 10,000 units this month only. The customer is willing to pay $5.50 per unit. Since the potential customer approached the firm, there will be no variable marketing costs incurred. Should the company accept the special order? Why or why not? Be specific.
b) Assume the same facts as in part a, except that the company is producing 40,000 units per month. Should the company accept the special order? Why or why not? Be specific.
c) List and describe other factors should be taken into consideration when deciding whether to accept a special order? Be specific in your responses.
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