Farley, Inc. is a contract manufacturer that produces customized computer compon
ID: 2359117 • Letter: F
Question
Farley, Inc. is a contract manufacturer that produces customized computer components for several well-known computer-assembly companies. Farley's latest contract with CompWest.com calls for Farley to deliver sound cards that simulate surround sound from two speakers. Farley spent several hundred thousand dollars to design the sound card to meet CompWest.com's specifications.Farley's president, Bryon Wilson, has stipulated a pricing policy that requires the bid price for a new job to be based on Farley's estimated costs to design, manufacture, distribute, and provide customer service for the job, plus a profit margin. Upon reviewing the contract figures, Farley's controller, Paul York, was startled to find that the cost estimates developed by Farley's cost account, Tony Hayes, for the CompWest.com bid were based on only the manufacturing costs. York is upset with Hayes. He is not sure what to do next.
Identify the parties involved in Paul York's ethical dilemma. What are his alternatives? How would each party be affected by each alternative? What should York do next?
Explanation / Answer
Parties involved in Paul York's ethical dilemma: - The cost estimation of the cost accountant leads to the ethical dilemma - Now this will affect the owner of the business and share holders of the business.Alternatives: 1. The first alternative is to correct the estimated costs 2. Second one is to proceed with the estimated costs Results of each alternative: 1. Correcting the estimated costs: The correction of estimated costs are time consuming and money consuming for the manufacturer, but this is ging to reduce the significant risk. the results of this alternative is increase in estimated costs as well as the bid price. The correct estimated costs will gain a required margin for ther concern. 2. Proceed with the estimated costs: The second alternative is to proceed with the estimated costs, this alternative will leads to a huge risk. The low estimated costs excluded the other costs, it leads to the mis representation of costs. So here the actual costs are very higher than the estimated costs but the price of the job is based on the estimated costs. Ultimately this alternative leads to decrease in bid price and increase in net income as well as earnings per share. The second alternative is to proceed with the estimated costs, this alternative will leads to a huge risk. The low estimated costs excluded the other costs, it leads to the mis representation of costs. So here the actual costs are very higher than the estimated costs but the price of the job is based on the estimated costs. Ultimately this alternative leads to decrease in bid price and increase in net income as well as earnings per share. What should York do next? In order to gain the required margin from the job, York has to correct the estimated costs. Not only for the margin but also for removing the risk of loss from operations.
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