Question

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 Frederick’s 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 Frederick’s decision, please be sure to address the impact on Cost of Goods Sold.

Professor's Discussion Points

What is the immediate effect on Cost of Goods Sold by shifting to plastic handles?

If there are cost savings from this business decision, is the savings reduced by the cost of defective handles that need to be replaced? Why or why not?

Could this potentially create more cost for the company than the intended savings? How might that happen? (Think: costs and time).

As a business owner, what risk does the company have to its reputation by reselling either potentially defective or deemed lower quality toasters?

Answer 1

The immediate impact of shifting to plastic handles will reduce the cost of goods sold for the company. As clearly indicated, shifting to plastic handles saves the company USD 1 for every toaster. Therefore, the immediate impact is reduction of cost of goods sold.

The costs savings as a result of this decision will surely be reduced of the number of defects are expected to go up. The replacement of defective handles will come at a cost. Therefore, this incremental cost will surely reduce the total savings made by this decision

The decision can potentially create more cost for the company. The cost of replacement of handles involves material (new handles), labour cost (for actual replacements) and other associated overheads. The savings mentioned in this question is USD 1 per toaster. Therefore, in case the toasters are returned in great quantities for replacement, it is very much possible that the costs of this decision may exceed the benefits derived out of the same.

The company, through the decision of re-selling potentially defective or low quality toasters runs a massive reputational risk. In case the company loses reputation in market and the customers start perceiving the company as selling low quality/defective toasters, it can potentially reduce the sales of the company significantly, thereby leading to significant reduction in profits or even losses

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