Question

Horizon Corporation manufactures personal computers. The company began operations in 2010 and reported profits for the years 2010 through 2015. Due primarily to increased competition and price slashing in the industry, 2016's income statement reported a loss of $20 million.

Just before the end of the 2017 fiscal year, a memo from the company's chief financial officer to Jim Fielding, the company controller, included the following comments: "If we don't do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write down. The resulting loss for 2017 will cause a violation of our debt covenants and force the company into bankruptcy.

I suggest that you ship half of the inventory to J.B. Sales, Inc., In Oklahoma City. I know the company’s president, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2017 which will boost our loss to a profit. The J.B. Sales will simply return the inventory in 2018 after the financial statements have been issued."

Discuss the ethical dilemma faced by Jim Fielding.

Answer 1

Discussion on ethical dilemma faced by Jim Fielding

First of all, the suggestion to ship half of the inventory to J. B. Sales, Inc. and record such shipment as Sales in the books of accounts is malpractice and should not be implemented at any cost not only this, the same goods will be re-sent to Horizon Corporation in the year 2018 is not at all solution to the problem of slashing prices issue faced by Horizon Corporation. Instead, Horizon Corporation should extend marketing efforts for sale of computers. Company can negotiate with buyers on pricing front and can offer healthy discount. For, the pricing and healthy discount to be offered, company should try to reduce variable costing as minimum possible and on the other hand company should be ready to operate at a lesser or minimal profit margin for year 2017 and 2018. Once, sales picks-up and inventory start reducing, company can plan out further production in end 2018 and 2019 at a reduced cost as down as possible. Thus, Jim Fielding should not implement this suggestion of shipment of half inventory to J. B. Sales, Inc and so on. Instead, he should concentrate on how inventory can be disposed off at a minimal profit so that liquidity will improve and then next year i.e. 2018 onward company should reduce overall costing of their product and can earn reasonable profit 2019 onward.