Question

LRF Prining provides printing services to many different corporate clients. Although LRF bids most jobs, some jobs, particularily new ones, are negotiated on a "cost plus" basis. Cost plus means that the buyer is willing to pay the actual cost plus a return (profit) on these costs to LRF.

Alice Reliey, controller for LRF, ha recently returned from a meeting where the president stated that he wanted her to find a way to charge more costs to any project that was on a "cost plus" basis. The president noted that the company needed more profits to meet its stated goals for the period. By charging more to the "cost plus" projects and therefore fewer costs to the to the jobs that were bid, the company should be able to increase its profit for the current year.

Alice knew why the president wanted to take this action. Rumors were that he was looking for a new position and if the company reported strong profits, the presidents opportunities would be enhanced. Alice also recognized that she could probably increase the cost of certain jobs by changing the basis used to assign the manufacturing overhead.

Questions:

1. Who are the Stakeholders in this situation?

2. Why does changing the manufacturing overhead cost increase profits? hint: Formula: Cost of a job= Direct materials + direct labor + manufacturing overhead

What are the ethical issues involved in this situation? Is what the president asking ethical?

3. What would you do if you were Alice?

Answer 1

1. The customers are the major stakeholders in this situation, as they would be affected by this situation or decision. 2. The more the cost, the more profits can be derived under a cost plus basis transaction. If cost if higher, the percentage of markup would result in a higher amount of profit as compared to if the cost was lower. Example (100*15% = 15; but 200*15% =30, here 100 and 200 are costs and 15% is markup percentage; so higher cost means higher profit in number even though % remains same.) The ethical issues involved here are: Not charging fairly to customers Not following fair pricing policy Asking employees to manipulate costs and not work in ethical manner. The ask of the president is not ethical. 3. If I would be Alice, I would report this to the higher management, the ethics committee and the audit committee. This would bring the intentions of President to light of everyone.