Case 4-55 Ethics and a Cost-Volume-Profit Application

Danna Lumus, the marketing manager for a division that produces a variety of paper products, is considering the divisional manager's request for a sales forecast for a new line of paper napkins. The divisional manager has been gathering data so that he can choose between two different production processes. The first process would have a variable cost of $10 per case produced and total fixed cost of $100,000. The second process would have a variable cost of $6 per case and total fixed cost of $200,000. The selling price would be $30 per case. Danna had just completed a marketing analysis that projects annual sales of 30,000 cases.

Danna is reluctant to report the 30,000 forecast to the divisional manager. She knows that the first process would be labor intensive, whereas the second would be largely automated with little labor and no requirement for an additional production supervisor. If the first process is cho- sen, Jerry Johnson, a good friend, will be appointed as the line supervisor. If the second process is chosen, Jerry and an entire line of laborers will be laid off. After some consideration, Danna revises the projected sales downward to 22,000 cases.

She believes that the revision downward is justified. Since it will lead the divisional manager to choose the manual system, it shows a sensitivity to the needs of current employeesa sensitivity that she is afraid her divisional manager does not possess. He is too focused on quantitative fac- tors in his decision making and usually ignores the qualitative aspects.

Required:

1. Compute the break-even point in units for each process.

2. Compute the sales volume for which the two processes are equally profitable. Identify the

range of sales for which the manual process is more profitable than the automated proc- ess. Identify the range of sales for which the automated process is more profitable than the manual process. Why does the divisional manager want the sales forecast?

3. Discuss Danna's decision to alter the sales forecast. Do you agree with it? Is she acting ethi- cally? Is her decision justified since it helps a number of employees retain their employment? Should the impact on employees be factored into decisions? In fact, is it unethical not to consider the impact of decisions on employees?