Question

You have just begun your summer internship at Tmedic. The company supplies sterilized surgical instruments for physicians. To expand sales, Tmedic is considering paying a commission to its sales force. The controller, Jane Hewitt, 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. She 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. Your overlooked the sales personnel’s $2,500 monthly salaries, and you did not include this fixed marketing expense in your computations. You are not sure what to do. If you tell Hewitt of your mistake, she will have to tell the president. In this case, you are afraid Tmedic 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 Hewitt of the error in your analysis. Why might the consequences not be as bad as you fear? Should Hewitt take any responsibility for your error? What could Hewitt have done differently?

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

Answer 1

1. Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales.

The purpose of the break-even analysis is to calculate the amount of sales that equates revenues to expenses and the amount of excess revenues, also known as profits, after the fixed and variable costs are met.

Exclusion of the sales personnel’s $2,500 monthly salaries is given wrong Break Even Point and it will not achive the profit expecation from new sales commission plan eventhough qty unit sale increase meet expected

2. Initial making as error was an unintentional act and it is not unethical activity as motive was not wrong; mistake can be happen from any one.

Subsequently failing to inform the controlle was an intentinal act and it might consider as unethical activity. Motive behind this to cover up the error. It may impact more on cost to company due not making planning on incorrect data. It is an inethical activity.

3. Admitting one has error is an indication that one has learned something, and is improve in it. This indication that committment with company to save it from unknown loss due to incorrect planning on erronous data. 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 informed. If it were my executive position and an employee did not tell me about an error discovered in their work, and it came to light later that they knew, they would be gone as it would affect company including my individual and team performance.