Brixton Surgical Devices, a public company with sales of over $900,000,000, is one of the world’s largest productions of surgical clamps, saws, screws, and stents. Its business involves production of both stock items and customs pieces for doctors at research hospitals.
At the end of the third quarter of 2011, 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 2011.”
“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 2012 to the fourth quarter of 2011. Of course, 2011 is where we need earnings to hit our bonus target. Hey, I’ve got another idea. We can also jack up productions 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 the promotion, and you’ve got to update the production schedule. This could end up being our best year ever in terms of bonuses!”
Required: Are the proposed actions of Ed and Robin ethical? What is the likely effect of their actions on shareholder value?
It is uncertainly unethical for Ed and Robin to offer discounts just to reach their targets to earn a huge bonus. Also, dumping overhead costs to inventory to inflate closing inventory to increase the profit is certainly only cooking books. The gross margin and the sales figures may look rosy for the year in which the figures are manipulated and will increase shareholder value. However, the fraud will most likely be detected during audit of the financial statements or in later years when the revenues do not match expenses , then the shareholders value will plummet and in extreme cases the firm may also have to shut down.
Brixton Surgical Devices, a public company with sales of over $900,000,000, is one of the world’s...
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...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 14% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year. The statement follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 18,400,000 Manufacturing expenses: Variable...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 23,000,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 17,500,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 22,500,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 25,500,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 21,500,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 21,500,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 24,000,000 Manufacturing expenses: Variable $...
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a sales commission of 15% for all items sold. Barbara Cheney, Pittman’s controller, has just prepared the company’s budgeted income statement for next year as follows: Pittman Company Budgeted Income Statement For the Year Ended December 31 Sales $ 22,000,000 Manufacturing expenses: Variable $...