Question

Atie Company produces plastic consumer products. Data for Atie Company from its 2019 income statement are shown below:

Revenues $5,000,000 Variable costs 3,000,000 Fixed costs 2,500,000 Operating income $ (500,000)

Sofia Brown, Atie’s president, is worried about Atie Company’s low profitability. She asks Victoria Gallagher, production manager, and Joshua Noto, controller, to create ways to decrease costs. After ten days, Victoria suggests decreasing variable costs to 50% of revenues by reducing the costs that Atie currently incurs for safe disposal of wasted plastic. Joshua is worried that reducing this cost would expose the company to potential environmental liabilities. He tells Victoria, “We would need to estimate the potential environmental liability costs and include them in our proposal.” “You can’t do that,” Victoria replies. “We may have to incur environmental liability costs in the future, but it’s important for this proposal to go through. Otherwise, we may have to go bankrupt and lose our jobs.”


Required:

1. Compute Atie Company’s breakeven revenues if variable costs are 50% of revenues.

2. Is Victoria’s proposal to incorrectly report environmental costs ethical? Provide arguments that support your view. In assessing the situation, consider the specific standards listed in “Institute of Management Accountants (IMA) Statement of Ethical Professional Practice” (described in Exhibit P-6 on page 11).

Answer 1

1)

Contribution margin = Sales – Variable cost percentage

If variable costs are 50% of the revenues, then contribution margin percentage also will be 50%. (100 -50)

Atie Company’s break even revenues (If variable costs are 50% of the revenues)

= Fixed cost / Contribution margin percentage

= $ 2500000/ .5 = $ 5000000

2)

Victoria’s proposal to incorrectly report environmental costs is not ethical. It violating the standards listed in “Institute of Management Accountants (IMA) Statement of Ethical Professional Practice”. The standards of Integrity and Credibility will be violated if this action performed. As per the standard of Credibility all information must be disclosed fairly and objectively and an organization have the duty to provide information that is going to influence the understanding of an interested user. Organization should also report any internal control deficiencies in information contrary to organization’s policy. While Victoria suggesting to incorrectly report environmental costs all of this areas of Credibility is violating. Standard of Integrity suggest that conflict of interest should be avoided and any activity should be avoided that will prevent the duties to carrying out ethically. And also activities that will discredit the profession also will be prevented. In the present scenario a conflict is occurring between the production manager and controller. And Victoria suggesting to do an activity that is not ethical and discrediting the profession. So Standard of Integrity also will violated if the production manager follows the suggestion. Because of the possibility of violating this ethical standards Victoria’s proposal to incorrectly report environmental costs is not ethical.