Hiding Returns - Ethical Dilemma

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.