Assume that you are a sales manager working with your boss to create a sales budget for next year. Once the sales budget is established, it will influence how other departments within your company plan to deploy their resources. For example, the manufacturing manager will plan to produce enough units to meet the budgeted unit sales. If the sales budget is too high it will result in excess inventories and if it is too low it will result in lost sales. You have studied all of the pertinent data and concluded that the "most likely" outcome is estimated sales of $1,000,000. You also believe that if the sales team works extra hard and has a terrific year, it has a modest chance of achieving an "optimistic" sales forecast of $1,200,000. Conversely, if the economy sours, you believe that your sales team can still achieve a "pessimistic" sales forecast of $900,000.

Required:

1. Assume that your company uses its sales budget for only one purposeto match the supply of manufactured products with customer demand, thereby minimizing inventories and lost sales. What sales forecast would you provide to your boss?
2. Assume that your company also uses its sales budget as a motivational tool to help employees strive for "stretch goals" and exceptional results. What sales forecast would you provide to your boss?
3. Assume that your company's sales budget is also used for a third purposeto determine your pay raise, bonus, and potential for promotion. If actual sales exceed the sales budget, it bodes well for your career. If actual sales are less than budgeted sales, it will diminish your financial compensation and potential for promotion. What sales forecast would you provide to your boss?
4. Are your answers to the first three questions the same or different? Why? If you know from past experience that your boss usually adds 5-10% to your forecast, how would this affect your answers to the first three questions?
5. Do you think it would be appropriate for your boss to establish the sales budget without any input from you? Why?
6. Do you think the company would allow you to establish the sales budget without any input from your boss? Why?

Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation with her management colleagues; the consensus was to ignore reporting this inventory as obsolete because reporting it would diminish the financial results and their bonuses.

Required:

1. According to the IMA's Statement of Ethical Professional Practice, would it be ethical for Perlman not to report the inventory as obsolete?
2. Would it be easy for Perlman to take the ethical action in this situation?

Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of auto repair shops of misleading customers and selling them unnecessary parts and services, from brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in "Managing for Organizational Integrity," Harvard Business Review, Volume 72 Issue 3: In the face of declining revenues, shrinking market share, and an increasingly competitive market . . . management attempted to spur performance of its auto centers. . .. The automotive service advisers were given product-specific sales quotassell so many springs, shock absorbers, alignments, or brake jobs per shiftand paid a commission based on sales. . .. [F]ailure to meet quotas could lead to a transfer or a reduction in work hours. Some employees spoke of the "pressure, pressure, pressure" to bring in sales. This pressure-cooker atmosphere created conditions under which employees felt that the only way to satisfy top management was by selling products and services to customers that they didn't really need. Suppose all automotive repair businesses routinely followed the practice of attempting to sell customers unnecessary parts and services.

Required:

1. How would this behavior affect customers? How might customers attempt to protect themselves against this behavior?
2. How would this behavior probably affect profits and employment in the automotive service industry?

In the 1970s, one million college-bound students were surveyed and asked to compare themselves to their peers. Some of the key findings of the survey were as follows: 70% of the students rated themselves as above average in leadership ability, while only 2% rated themselves as below average in this regard. With respect to athletic skills, 60% of the students rated their skills as above the median and only 6% of students rated themselves as below the median. 60% of the students rated themselves in the top 10% in terms of their ability to get along with others, while 25% of the students felt that they were in the top 1% in terms of this interpersonal skill.

Required:

1. What type of cognitive bias reveals itself in the data mentioned above?
2. How might this cognitive bias adversely influence a manager's planning, controlling, and decision-making activities?
3. What steps could managers take to reduce the possibility that this cognitive bias would adversely influence their actions?

Assume that you just completed a December weekend vacation to a casino within the United States. During your trip you won $10,000 gambling. When the casino exchanged your chips for cash they did not record any personal information, such as your driver's license number or social security number. Four months later while preparing your tax returns for the prior year, you stop to contemplate the fact that the Internal Revenue Service requires taxpayers to report all gambling winnings on Form 1040.

Required:

1. Would you report your gambling winnings to the Internal Revenue Service so that you could pay federal income taxes on those winnings?
2. Do you believe that your actions are ethical? Why?