D9

FDP Company produces a variety of home security products. Gary Price, the companys president, is concerned with the fourth-quarter market demand for the companys products. Unless something is done in the last two months of the year, the company is likely to miss its earnings expectation of Wall Street analysts. Price still remembers when FDPs earnings were below analysts expectation by two cents a share three years ago, and the companys share price fell 19% the day earnings were announced. In a recent meeting, Price told his top management that something must be done quickly. One proposal by the marketing vice president was to give a deep discount to the companys major customers to increase the companys sales in the fourth quarter. The company controller pointed out that while the discount could increase sales, it may not help the bottom line; to the contrary, it could lower income. The controller said, Since we have enough storage capacity, we might simply increase our production in the fourth quarter to increase our reported profit. Required Gary Price is not sure how the increase in production without a corresponding increase in sales could help boost the companys income. Explain to Price how reported income varies with respect to production level. Is there an ethical concern in this situation? If so, which parties are affected? Explain.

*** Please reply with TEXT not images