“I need you to prepare a projection for me,” Hannah Randall, the Barstow Group’s manager, said as she walked into Isaac Bradley’s office. “As you know, we’ve been considering a new line of hair care products. It looks like we’re going to need a $1 million investment to get it up and running. We’re getting a great deal on the equipment because my brother-in-law, the manufacturer’s sales representative, is willing to lower the sales price and sacrifice some of his commission to make the sale.”

“I’ll ask the marketing department for some sales estimates and develop an estimate of the additional operating income we can expect from the line,” replied Isaac. “I’m sure I can have some answers for you tomorrow.”

Isaac met with Brenda Bell, head of market research, and told her what he needed. “Isaac, I can’t give you a specific sales number; our research indicates a range of possible sales,” Brenda replied.

“There is a 40% probability of $2 million in sales, a 50% probability of $2.5 million in sales, and a 10% probability of $3 million in sales.” “Thanks, Brenda,” Isaac said. “I can work with that information.”

Isaac returned to his office and began to run the numbers. Based on Brenda’s estimates, he decided to calculate projected operating income at each of the three possible sales levels. After consulting additional information that Hannah had provided. Isaac developed the following projected income statements.

Isaac met with Hannah the next day to give her the profit projections. “Isaac, why are you giving me three different projections?” Hannah asked after looking over the report. “I need one set to present to the president and get his approval to proceed with the project.” Isaac explained what Brenda Bell had said about the probability of the three different sales levels.

Hannah thought for a minute and then replied, “I’ve been wanting to start the Hannah Hair Care line for quite some time. The division will never approve a project with an ROI that is lower than the 18% corporate minimum. I want you to prepare an analysis based on only the $3 million projected sales level. The division will approve anything with a 35% ROI.”

Isaac returned to his office and began preparing the analysis Hannah had requested.

Required

a. What are the ethical issues facing Hannah, Isaac, and Brenda?

b. Should Isaac comply with Hannah’s request to prepare an analysis based on only the $3 million sales estimate? Why or why not? What guidance does the IMA’s Statement of Ethical Professional Practice provide to Isaac?

c. What, if any, additional actions should Isaac take at this point?

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Sales revenue $2,000,000 $2,500,000 $3,000,000 Variable expenses 1,300,000 1,625,000 1,950,000 Contribution margin Fixed expenses 700,000 875,000 1,050,000 700,000 700,000 700,000 Operating income $ $ 175,000 $ 350,000 ROI 0% 17.5% 35%