CASE 1

Rashid Daley is the manager of the athletic shoe division of Raider Products. Raider is a European-based company that has just purchased Fastfoot, a leading European shoe company. Fastfoot has long-term production contracts with suppliers in two East European countries: Hergonia and Tanista. Daley receives a request from Karen Neal, president of Raider Products. Daley and his controller, Brooke Mullins, are to make a presentation to the next board of directors meeting on the cost competitiveness of its Fastfoot subsidiary. This should include budgeted and actual procurement costs for 2018 at its Hergoniaand Tanista supply sources.

Mullins decides to visit the two supply operations. The budgeted average procurement cost for 2018 was $14 per pair of shoes. This includes payments to the shoe manufacturer and all other payments to conduct business in each country. Mullins reports the following to Daley:

Hergonia. Total 2018 procurement costs for 250,000 pairs of shoes were $3,900,000. Payment to the shoe manufacturer was $3,108,000. Very few receipts exist for the remaining $729,000. Kickback pay-ments are viewed as common in Hergonia.

Tanista. Total 2018 procurement costs for 900,000 pairs of shoes were $12,300,000. Payment to the shoe manufacturer was $10,316,000. Receipts exist for $827,000 of the other costs, but Mullins is skeptical of their validity. Kickback payments are a way of business in Tanista.

At both the Hergonia and Tanista plants, Mullins is disturbed by the employment of illegal immigrants. She is told that all major shoe-producing companies have similar low-cost employment practices in both countries.

Daley is uncomfortable about the upcoming presentation to the board of directors. He was a lead-ing advocate of the acquisition. A recent business magazine reported that the Fastfoot acquisition would make Raider Products the global low-cost producer in its market lines. The stock price of Raider Products jumped 21% the day the Fastfoot acquisition was announced. Mullins, likewise, is widely identified as a proponent of the acquisition. She is seen as a rising star due for promotion to a division management post in the near future.

Required

1. What summary procurement cost variances could be reported to the board of directors of Raider Shoes?

2. What ethical issues do (a) Daley and (b) Mullins face when preparing and making a report to the board of directors?

3. How should Mullins address the issues you identify in requirement 2?