Question

Your company is considering paying a commission to the sales force to expand sales. You are charged by the Chief Financial Officer with 1) computing a new breakeven point, and 2) the operating profit increase by 20% with the new sales commission plan.

You spend the next week gathering information, analyzing the information, and performing various cost-volume-profit analysis. You generate a report showing the new plan should lead to a substantial increase in sales with a minimum increase in breakeven sales. You create a memo explaining this report and the president of the company is pleased with your information and plans to implement it.

A few days later you review your numbers and realize your analysis has missed using the sales personnel’s monthly salary and the fixed selling costs. You re-calculate your numbers and realize the results are drastically different.

You are unsure if you should report this new results to the CFO, who will have to tell the president of the error. Since you are new to the company, you are wondering what will happen if you do and do not report this issue.

1. Explain the issues with excluding the monthly salary and fixed selling costs in the calculation and why they are important.

2. What ethical issues do you need to understand, based on the results of your original and revised calculations?

3. Explain how this situation could have been avoided and who is responsible for the issue.

Answer 1

1. Excluding two items salary and fixed selling cost will give high impact in the operating profit. A revenue booked against each sales personnel's are mapped, similarly cost associated / occurred for each personnel should mapped to derive the actual operating profit. Hence this two items in critical.

2. Accountability and Fairness

3. Commitment to excellence principle, Multiple iteration with CFO can avoid this situation. The responsible will be the person who performed the cost-volume-profit-analysis work.