B earn their target profit of rs should the Homs consider before they make their
ID: 2410334 • Letter: B
Question
B earn their target profit of rs should the Homs consider before they make their decision as to ht 4 whether to open the restaurant? thical Issue 20-1 you hav sterilized surgical instruments for physicians. To expand sales, Omni is con- e just begun your summer internship at O mni Instruments. The Pl naying a commission to its sales force. The controller, Matthew Barnhill, asks sidering mpute: (1) the new breakeven sales figure, and (2) the operating profit if sales you to 15% under the new sales commission plan. He thinks you can handle this increase ecause you learned CVP analysis in your accounting class. k b ras You spend the next day collecting information from the accounting records, forming the analysis, and writing a memo to explain the results. The company t is pleased with your memo. You report that the new sales commission plan en lead to a significant increase in operating income and only a small increase in breakeven sales. The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel's $2,800 monthly salaries, and you did not include this fixed selling cost in your computations. You are not sure what to do. If you tellExplanation / Answer
Answer -1:
In CVP analysis, costs are divided into fixed and variable costs. Omitting the sales personnel’s monthly salaries (fixed in nature) would decrease the total fixed cost of the company.
Break-even Sales (Units) = Total Fixed Cost / Contribution Margin per Unit
Due to Omission of sales personnel’s monthly salaries, the numerator of break-even sales will decrease will reduce the breakeven sales level.
When the sales personnel’s salaries will be included in total fixed cost would also rise that will increase the break-even sales level. If the share of sales personnel’s monthly salaries in total cost is significant then it may cause the president to reject the sales commission proposal.
Answer- 2:
Initial error of overlooking the sales personnel’s monthly salaries is an unintentional act. Errors are part of human life. But the subsequently, failing to inform the controller about the error would be a willful act and wilful act to mislead others are considered as fraud. So committing an error is not unethical but failure to rectify the same is unethical.
Answer- 3:
Every financial officer knows that interns are there to learn and on reporting about the error in CVP analysis, Mr. Barnhill may realize that you have learned something and say “Thank you for bringing this error into my notice, Let’s find out what effect this will have on results”.
Yes, Mr. Barnhill should take the responsibility of the error as before communicating the result of analysis to President, Mr. Barnhill is required to review the work because interns are not expert in their work and it’s common they will commit errors in initial stages.
Answer- 4:
Mr. Barnhill should be informed about it as one day later on the error will be revealed in near future. At that time you will be viewed as an unethical person. You will be fired immediately for the same.
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