Ethical Issue You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute (1) the new breakeven sales figure and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class. You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales. The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel?s $2,800 monthly salaries and you did not include this fixed marketing cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship. Requirements 1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal? 2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller? 3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently? 4. After considering all the factors, should you inform Barnhill or simply keep quiet?

1. Omitting salaries in the computation would result in understating the breakeven sales level. Including the salaries would increase the breakeven sales level. The magnitude of the mis - statement would depend on the relative contribution of fixed marketing exp enses to total exp enses. If the mis - statement were severe enough the decision to proceed with the original plan may have to be revisited . 2. Initially making the error was an inadvertent act. Failing to inf orm the controller of what might be a material error would be an int entional act. It is not unethical to make a mistake. It IS unethical to cov er it up. 3. Admitting one has erred is an indication that one has learned something , and is smarter today than yesterday. Almost any financial officer is going to say "thank you for telling me. Let ' s take a look at what this means." Interns don ' t make policy, and their work should be carefully reviewed before any decisions, especially major corporate sales decisions, are based on them. Hewitt should have reviewed the work , or had it reviewed . 4. Hewitt should be inf ormed . If it were my executive position and an employee DIDN 'T tell me about an error dis cov ered in their work , and it came to light later that they KNEW , they would be gone