Question

2-1 ETHICS CASE: BRIXTON SURGICAL DEVICES [LO 4, 5]

Brixton Surgical Devices, a public company with sales of over $900,000,000, is one of the world's largest producers of surgical clamps, saws, screws, and stents. Its business involves production of both stock items and custom pieces for doctors at research hospitals.

At the end of the third quarter of 2017, it became clear to Ed Walters, chief operating officer, and Robin Smith, chief financial officer, that the company would not make the aggressive annual earnings target specified by the board of directors. In consequence, Ed and Robin would not receive bonuses, which historically had averaged about 35 percent of their base compensation. The two devised the following strategy.

“Here's what we'll do,” suggested Ed. “We've never offered our customers a discount. Let's change that right now. We'll offer a 25 percent discount on all orders placed in October and November for delivery in December of 2017.”

“That will certainly boost fourth-quarter sales,” said Robin. “But you know, it won't really increase total sales. It'll just transfer some sales from the first quarter of 2018 to the fourth quarter of 2017. Of course, 2017 is where we need earnings to hit our bonus target. Hey, I've got another idea. We can also jack up production of our stock items in the fourth quarter. With our high-priced production equipment, we've got a ton of overhead. But the more we produce, the more overhead we can bury in inventory. With lower unit costs and higher sales, profit will go way up. Let's get going on execution. I've got to get the marketing people working on the promotion, and you've got to update the production schedule. This could end up being our best year ever in terms of bonuses!”

Instruction: Research outside using our on-line library for at least one academic reliable source (Wikipedia is not allowed), that will help you to support and apply your argument for this week's case. Please write it in your own words on what you have learned from this week's discussion and research, and how it apply to the case, please provide all the sources you used, and provide a well written at least 250 words paper.

Please do your computation on excel (if computation is needed), and copy and paste onto your paper that fit appropriate to your feedback.

Answer 1

The proposed actions of Ed (the COO) and Robin (the CFO) are as follows:

1. To escalate profit, they plan to propose discounts to customers for orders in October and November that can be shipped in December. This approach is sometimes stated to as "channel stuffing" since the sales channel is being "stuffed" with merchandise.

This does not violate GAAP, since the company has actual orders that are shipped before year end. However, a footnote revelation in the annual report or shareholders will be needed.

2. The second plan, increasing production to lower unit costs and bury fixed production costs in inventory, also, most likely, does not violate GAAP. But it definitely harms shareholder value. The company is using shareholders' money to make an investment in inventory that is not really desired.

Effect of their action on shareholder value:

• The shareholders will think there is a fairly permanent growth in revenue, but will adversely react in the first quarter of the next year when the revenues and profits fall.

Conclusion:

The actions taken by Ed and Robin are not immoral but the shareholders’ value will adversely affect the shareholders’ value.