Andy Rich is an agent for Steve Kurl, a basket-ball player who has been on a number of championship professional teams over the last 10 years. Steve complained to Andy that his compensation does not seem to be what was promised.

In addition to salary, Steve was promised a percentage of the gate receipts after deduction of expenses for each game. However, the organization’s accountants told Steve that little profit is left after all of the expenses have been deducted. Andy asks to review the financial reports from the last five games. As he reviews the reports, Andy notices that the expenses for each game include large amounts for administration and public relations. He asks the accountant about these expenses and is told that these costs are allocated using revenue as the allocation base. The rate is calculated by dividing estimated total administrative and public relations costs by estimated total revenue for all of the games played during the regular season.

Since Steve played in a number of championship games, Andy asks for the financial reports for those games, too. It appears that the same rate was used to allocate administration and public relations for postseason games. He brings this practice to the attention of the accountant, who responds that each game has to have a share of the expenses, and that it has always been done this way.

REQUIRED

A. Why is there no single way to calculate profit for each game?

B. Is this scenario an ethical dilemma? Why or why not?

C. The team allocates its administration and public relations costs using an estimated allocation rate. Is this method likely to be biased? In other words, are allocated costs likely to be higher or lower than actual costs for the year? Explain.

D. Provide arguments in favor of allocating administration and public relations costs as an expense of each game.

E. Provide arguments against allocating administration and public relations costs as an expense of each game.

F. Brainstorm ideas and recommend a method for calculating the profits for each game that you think would be fair to the owners and fair to the players. Explain how your conclusion addresses all important stakeholders.