Frederick is the manager of a company that produces toasters. He has instructed his production department to replace a steel handle shaft with a plastic shaft. This will save the company $1 per toaster. Since making this change, the toasters are being returned in great quantities because of handle breakage. Frederick tries to hide his poor decision. He instructs the accountant to ignore the returned items and put them back into inventory so they can be resold. Manufacturing was told to install new plastic handles and place the toasters into finished goods. What effect does Fredericks action have on the Cost of Goods Sold section? Is it ethical? What could be the eventual result of his actions?

To help illustrate the adverse impact of Fredericks decision, please be sure to address the impact on Cost of Goods Sold.

Professor's Discussion Points

What is the immediate effect on Cost of Goods Sold by shifting to plastic handles?

If there are cost savings from this business decision, is the savings reduced by the cost of defective handles that need to be replaced? Why or why not?

Could this potentially create more cost for the company than the intended savings? How might that happen? (Think: costs and time).

As a business owner, what risk does the company have to its reputation by reselling either potentially defective or deemed lower quality toasters?