AIP 1.18 Ethical Behavior LO 7 FulRange Inc. produces complex printed circuits for sound amplifiers. The circuits are sold primarily to major component manufacturers, and any production overruns are sold to small manufacturers at a substantial discount. The small-manufacturer market segment appears very profitable because the basic operating budget assigns all fixed production expenses to the major manufacturers, the only predictable market. A common product defect that occurs in production is a 'drift' that is caused by failure to maintain precise heat levels during the production process. Rejects from the 100 percent testing program can be reworked to acceptable levels if the defect is drift. However, in a recent analysis of customer complaints, Scott Richardson, the cost accountant, and the quality control engineer have ascertained that normal rework does not bring the circuits up to standard. Sampling shows that about one-half of the reworked circuits will fail after extended, high-volume amplifier operation. The incidence of failure in the reworked circuits is projected to be about 10 percent over one-to five-years' operation. Unfortunately, there is no way to determine which reworked circuits will fail, because testing does not detect this problem. The rework process could be changed to correct the problem, but the cost-benefit analysis for the suggested change in the rework process indicates that it is not feasible. FulRange's marketing analyst has indicated that if the problem is not corrected, it will significantly affect the company's reputation and customer satisfaction. Consequently, the board of directors would interpret this problem as having serious negative implications on the firm's profitability. Richardson has included the circuit failure and rework problem in his report that has been prepared for the upcoming quarterly meeting of the board of directors. Due to the potential adverse economic impact, Richardson has followed a long-standing practice of highlighting this information.