Question

Jay Farrar Company is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Jay Farrar introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success. The success of the product has Josh Ritter, the manager of the New Products division, worried, however. He was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. He did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. He preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Mr. Ritter then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. To receive full credit, answer both:

• Describe the alternatives that you as an accountant would have in this situation.
• Indicate which alternative is best.

Please not handwritten, I can never understand.

Answer 1

Requirement 1

Alternatives :

1. Create another account presenting the excess of the product’s sale and an account of expenses that would be sustained during testing, to demonstrate that they could pay for the testing of the product
2. Indicate the returns account for the product and what it is costing the company to have a product that is perishable and what we would save if we did the testing now in order to make sure that the next batch of a well selling product is even better than the last. Then they could market it as durable. Not perfect to make the variations that the manager asks for because that would be altering accounts that has nothing to do with the product issue that he is worried about and would mess up balances because we have been prorating them all year already and to change at the end of the fiscal year would mess everything up.

Requirement 2

Pay for testing and re-release with a better product has a win-win to it. They are making the money needed for testing with the original sales and would be able to get a better product to the customers, therefore retaining those they originally sold that love the product and being able to make what they love even better.