Garner Company requires its marketing managers to submit estimated cost behavior

Question

Garner Company requires its marketing managers to submit estimated cost behavior data on all requests for new products or expansions of a product line. Judy Oslo is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a variable cost of $5 per unit. Based on these calculations, the low-volume project would not be profitable. She shares her dismay with Nina Smythe, another manager. Nina strongly advises her to revise her estimates. She point out that several of the costs that had been classified as fixed costs could be considered variable, since they are mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable.
(A) Who are the stakeholders in this decision?
(B) Is it ethical for Judy to revise the costs as indicated? Explain
(C) What should Judy do?

Explanation / Answer

(a) everyone is a stakeholder here, the employees, share holders, executives, families of employees. Judy is the only one who would be responsible for this decision though. (b) it is not ethical to put mixed costs in fixed or variable willy nilly. Judy would not be acting ethically if she put all of the mixed costs into variable. (c) Judy should go back and correctly place the mixed costs components into fixed or variable and then recalculate and see if the low-volume project would be profitable. The true cost will be better than her initial calculation indicated, and it might be profitable. Judy should also thank the other manager for pointing out to her that she had classified several of the costs incorrectly in her initial calculation.

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