Question

FDP Company produces a variety of home security products. Gary Price, the company's president, is concerned with the fourth-quarter market demand for the company's products. Unless something is done in the last two months of the year, the company is likely to miss its earnings expectations of Wall Street analysts. Price still remembers when FDP's earnings were below analysts' expectations by two cents a share three years ago, and the company's share price fell 19% the day earnings were announced. In a recent meeting, Price told his top management that something must be done quickly. One proposal by the marketing vice president was to give a deep discount to the company's major customers to increase sales, it may not help the bottom line; to the contrary, it could lower income. The controller said, "Since we have enough storage capacity, we might simply increase our production in the fourth quarter to increase our reported profit."

Discussion points:

Gary Price is not sure how the increase in production without a corresponding increase in sales could help boost the company's income. Explain to Price how income caries with respect to production level.

Is there an ethical concern in this situation? If so, which parties are affected? Explain.   The post should be at least 250 words.

Answer 1

Absorption costing income is influenced by changes in units sales and units of production. Net operating income can be increased simply by Producing more units If those units are different than variable costing income.

Absorption reporting is a temprory fix to the problem if the units are not sold they could create problem. It is an ethical situation because using absorption instead of the later Is not a lie but a direct truth. As an investor or someone affected by that manipulation of the truth would be upset in that situation.