At 3:00 p.m. on Friday afternoon, Dan Murphy, vice president of distribution, rushed into Grace Jones's office exclaiming, "This is the fourth week in a row we've fi led a record number of claims against our freight carriers for products damaged in shipment. How can they all be that careless? At this rate, we'll have fi led over

$150,000 in claims this year to replace damaged goods. Some of the freight carriers claim we're their worst customer. Sure, we give them lots of business, but we've got the highest claims level." "That's interesting," replied Grace, the company's CFO. "Last week Jeff and I were talking about the great cartons he just purchased for shipping our products. In fact, he had to get special permission to enter into a long-term contract with the company, so that it would provide us with the cartons at a reduced price. He prepared a great proposal outlining the increase in income we could expect based on the number of cartons we use per period and the cost savings per carton. His proposal for tying us into a long-term contract was accepted because he specifically addressed the need to maintain the quality that our customers have come to expect while at the same time improving the bottom line. If anything, I would have thought our claims would have been reduced, and that we would have started to save money by buying boxes in bulk. Why don't you see if Jeff has any insights into the problem?" Dan found Jeff in the coffee room early Monday morning. "Hey Jeff, we've been having lots of trouble lately with damage claims. Grace tells me you bought some new cartons for shipping. Do you think they could be causing the problem?" "Gee, I hope not," replied Jeff. "My evaluations have been awesome since I cut costs so dramatically. In fact, the product managers have been singing my praises since the variable costs of shipping went down and their contribution margins went up."

"Well, I've got to figure this out," said Dan, "because the freight companies are breathing down my neck, and they've threatened to quit paying our claims. The sales reps are all over me, too, because their customers are irritated at having to go through the claims process. They want their products delivered free of damage, the first time. Let me take a look at the cartons and see if I can figure out the problem." As Dan left the room, Jeff started to worry. Jeff was aware of the crush weight standards (i.e., the strength) of the company's cartons. He decided to save the company some money by trying a carton with a slightly lower crush weight. Of course, the savings would also make Jeff look good at annual evaluation time, and this was important since he was up for a promotion. He had gotten such a great deal on the new cartons because his brother Marvin had just been named sales manager at a new carton manufacturing company. Jeff signed the long-term contract so that his brother would achieve a sizeable year-end bonus for exceeding his sales targets. Part of the bonus was a week-long trip for two to the Super Bowl, and Marvin promised Jeff he could go with him.

Wednesday morning Dan called Jeff and said, "I've been talking with our shipping department, and one of the guys figured out that the cartons on the bottom of the pallet seem to suffer the most damage. It turns out that the crush weight of the new cartons you purchased wasn't as high as that of the old boxes. We've fi led all those damage claims against our carriers, and the damage hasn't been their fault at all. I guess you need to go back to purchasing the sturdier cartons."

"Can't do that for the next 15 months," Jeff moaned. "We're locked into a long-term contract."

Required

a. Identify the ethical issues in this case.

b. What steps should Dan and Jeff take next?

c. What are the costs and benefits to the company for making an ethical decision?