Connect Homework Acct 301 Ethics Case 8-7 Profit Manipulation. In 2015 the Moncr

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Connect Homework Acct 301

Ethics Case 8-7

Profit Manipulation.

In 2015 the Moncrief Company purchased from Jim Lester the right to be the sole distributer in the western states of a product called Zelenex. In payment, Moncrief agreed to pay Lester 20% of the gross profit recognized from the sale of Zelenex in 2016.

Moncrief uses a period inventory system and the LIFO inventory method. Late in 2016, the following information is available concerning the inventory of Zelenex:

Beginning inventory, 1/1/16 (10,000 units @ $30) $300,000

Purchases (40,000 units @ $30) $1,200,000

Sales (35,000 units @ $60) $2,100,000

By the end of the year, the purchase price of Zelenex had risen to $40 per unit. On Dec 28, 2016, three days before year-end. Moncrief isin a position to purchase 20,000 additional units of Zelenex at the $40 per unit price. Due to the increase in purchase price, Moncrief will increase the selling price in 2017 to $80 per unit. Inventory on hand before the purchase, 15,000 units, is sufficient to meet the next six months' sales and the company does not anticipate any significant changes in purchases price during 2017.

1. Determine the effect of the purchase of the additional 20,000 units on the 2016 gross profit from the sale of Zelenex and the payment due to Jim Lester. Show work,

2. Discuss the ethical dilemma Moncrief faces in determining whether or not additional units should be purchased and why?

Explanation / Answer

1. Impact on gross profit of year 2016. Gross profit will reduce by $2,00,000

2. Ethical dilemma is if Moncrief purchases 20,000 units@40, it will hugely impact the gross profit of year 2017. Opening Inventory will be valued 15000 units @30 per unit and sale price of the same shall be $80 per unit. This will result in higher commission to Mocrief (being 20% of gross profits) which creates a conflict of interest. Secondly, just be purchasing inventory @40 at year end, Mocrief will be raising the sales price to $80 without considering the average cost of Inventory or cost of sales.

Sale                          35,000                                  60                    2,100,000 Cost of sale                          35,000                                  30                    1,050,000 Gross Profit                    1,050,000 Sale                          35,000                                  60                    2,100,000 Cost of sale                          20,000                                  40                       800,000                          15,000                                  30                       450,000 Subtotal                    1,250,000 Gross Profit                       850,000 Reduction in Gross Profit of 2016                       200,000

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