Ethics and Decisions The Road Masher Tire Company manufactures high-speed specialty tires for passenger cars. At the beginning of this year, it began selling a new tire under the brand name “The Racer.” The tire has been popular, and 100,000 tires have been installed this year. In addition, another 100,000 tires have been sold to dealers.

Now, as a member of Road Masher’s executive committee, you are faced with a serious problem. Production testing has discovered that in cold weather, when the tire is operated at high speeds before it has been warmed up by lower-speed driving, the tread comes off. In fact, with a cold tire, the tread will always come off at speeds in excess of 90 mph. All previous testing had been done in Florida, and the defect was not anticipated. The defect has now been corrected, and there will be no problems with the tires shipped next year.

Road Masher recorded revenue of $20 million on the sale of Racer tires this year. Based on past experience, warranty expense and an estimated liability of 2 percent of sales ($400,000)

was recorded. The executive committee has received the following reports and recommendations about the problem:

a. The production staff recommends announcing a 100 percent recall of all 200,000 tires and replacing them, at no charge, with tires of the corrected design.

b. The marketing department recommends replacing the 100,000 tires still in the hands of dealers as quickly as possible but not announcing it as a recall. News of a recall could have a significant adverse effect on sales for several years.

c. The legal department reports that the company could be subject to a number of costly lawsuits for failed tires that result in accidents. The loss of one such lawsuit would cause many more suits to be filed. The legal staff makes no recommendation, but warns of the potential liability.

d. The accounting department reports that:

1. A recall of all 200,000 tires will cost about $10 million for replacement tires, plus about $500,000 for costs related to the replacement.

. Replacing the tires in the hands of dealers will cost about $5 million for the tires, plus about $100,000 for related costs.

3. If the replacement is to take place, a more accurate estimate of the costs should be prepared and additional expense and a liability recorded immediately. This will result in an operating loss for the year.

4. If replacement does not take place, warranty expense and the estimated liability for this year should be increased to match the new predicted failure rate. Also, whether the tires are replaced or not, the company should disclose the contingent liability for possible losses from failed tires.

in)

As a member of the Executive Committee, what do you recommend? What part of your answer is based on financial issues and what part is based on ethical business issues? What part of your answer is based on what is best for society, what is best for the company, and what is best for you (given that a significant portion of your compensation is based on the company’s reported net income)?