Purpose: Discuss the ethics of changing production to meet objectives KSAs: Understand inventory effects under absorption costing; consider ethical dilemma

Points: 10

Admin: This is a multi-part question. There are no minimum word counts but you must answer the question in full. Discussion Initial Response Due by Wednesday:

Ellen Clawson, the sales manager of Long Beach Luxury Beach Furniture, is growing concerned that the division will not be able to meet its current period income objectives. Meeting the income objectives also means all managers receive a 3% bonus. The division uses absorption costing for internal profit reporting and had an appropriate level of inventory at the beginning of the period. Profits can be boosted by increasing production by 30% at the end of the period. The increased production will allocate fixed costs over a greater number of units, reducing cost of goods sold and increasing earnings. Unfortunately, it is unlikely that additional production will be sold during this period, resulting in a large ending inventory balance. The furniture will be sold in the next period, but they would need to pay additional money to store the extra furniture.

Kento, the Production Manager, has come to Ellen to determine exactly how much additional production is needed to meet sales projections. Ellen is conflicted. If she tells the Kento to increase production by 30%, it will mean the company will produce too many units this period. If she tells Kento that no additional production is needed, they will miss their profit projections.

1. Discuss the pros and cons of both options.

2. How will this impact operating income and inventory if absorption costing concepts are used?

3. What option would you choose and why?