You have just begun your summer internship at ProStar Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, ProStar is considering paying a commission to its sales force. The controller, Leonard Hines, 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 selling cost in your computations. You are not sure what to do. If you tell Leonard Hines of your mistake, he will have to tell the president. In this case, you are afraid ProStar 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 Leonard Hines of the error in your analysis. Why might the consequences not be as bad as you fear? Should Hines take any responsibility for your error? What could Hines have done differently?

4. After considering all the factors, should you inform Hines or simply keep quiet?