PROBLEM 7-1. Decision Making and Ethics [LO 1, Ethics] Joan Paxton, VP of market

Question

PROBLEM 7-1. Decision Making and Ethics [LO 1, Ethics] Joan Paxton, VP of marketing for Supertone Recording Equipment, has developed a marketing plan for presentation to the company’s president. The plan calls for television ads, something the company has never used. As part of her presentation, she will indicate the impact of the TV ads on company profit as follows:

Incremental sales from increased exposure                          $9,600,000

Less:

Incremental cost of goods sold $4,200,000

Cost of TV ads                                    3,100,000                             7,300,000

Incremental profit                                                                           $2,300,000

While Joan is quite confident in the cost of the ads and the incremental cost of goods sold if sales are $9,600,000, she is quite uncertain about the sales increase. In fact, she believes that her estimate is on the high side. However, she also believes that if she puts in a more conservative estimate, such as $7,000,000, the president will not go along with the TV ads even though they still will generate substantial profits at $7,000,000 of incremental sales.

Is it unethical of Joan to bias her estimate of incremental sales on the high side, given that she believes the ultimate outcome is in the best interest of the company?

Explanation / Answer

Yes, it is very unethical on the part of Joan to bias her estimate of incremental sales on the high side when she believes that its occurance probability is very less.

She could have presented the incremental costs and the profits of television Ads plan in much reliable way, through presenting the effect on profits at 3 or 4 levels of the Sales increase, beginning from the least most probable increase in sales and show how the profits will increase. The presentable table could be:

Incremental Sales ($' in million) 6 7 8 9 9.6 Less: Incremental cost of goods sold 2.6 3 3.5 3.9 4.2 Less: Cost of TV ads 3.1 3.1 3.1 3.1 3.1 Incremental profit 0.3 0.9 1.4 2 2.3

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