CVP Analysis; Commissions; Ethics Lionel Corporation manufactures pharmaceutical products sold through a network of sales agents in the United States and Canada. The agents are currently paid an 18% commission on sales; that percentage was used when Lionel prepared the following budgeted income statement for the fiscal year ending June 30, 2016. $28,500 $12,800 3,500 LIONEL CORPORATION Budgeted Income Statement For the Year Ending June 30, 2016 ($000 omitted) Sales Cost of goods sold Variable Fixed Gross profit Selling and administrative costs Commissions Fixed advertising cost Fixed administrative cost Income before interest and taxes Fixed interest cost Income before income taxes Income taxes (30%) Net income 16,300 $12,200 $ 5,130 770 2,150 8,050 $ 4,150 700 $ 3,450 1,035 $ 2,415 Since the completion of the income statement, Lionel has learned that its sales agents are requir- ing a 5% increase in their commission rate (to 23%) for the upcoming year. As a result, Lionel's presi- dent has decided to investigate the possibility of hiring its own sales staff in place of the network of sales agents and has asked Alan Chen, Lionel's controller, to gather information on the costs associ- ated with this change. Alan estimates that Lionel must hire eight salespeople to cover the current market area, at an aver- age annual payroll cost for each employee of $80,000, including fringe benefits expense. Travel and entertainment expense is expected to total $600,000 for the year, and the annual cost of hiring a sales manager and sales secretary will be $150,000. In addition to their salaries, the eight salespeople will each earn commissions at the rate of 10% of sales. The president believes that Lionel also should increase its advertising budget by $500,000 if the eight salespeople are hired.

5. What are the ethical issues, if any, that Alan should consider?