Question

Aranguez Corporation produces a molded plastic casing, LX20A, for desktop computers. Summary data from its 2013 income statement are as follows:

Revenues	$     8,000,000
Variable costs	(4,800,000)
Fixed costs	(3,000,000)
Operating income	$        200,000

Jane Dall, Aranguez’s president, is very concerned about Aranguez Corporation’s poor profitability. She asks Giselle James, production manager, and Lester Saline, controller, to see if there are ways to reduce costs.

After two weeks, James returns with a proposal to reduce variable costs to 50% of revenues by reducing the costs Aranguez currently incurs for safe disposal of waste plastic. Saline is concerned that this would expose the company to potential environmental liabilities. He tells James, “We would need to estimate some of these potential environmental costs and include them in our analysis.” “You cannot do that,” James replies. “We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company. We don’t want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing.”

Required

1. Calculate Aranguez Corporation’s breakeven revenues for 2013. (2 Points)
2. Calculate Aranguez Corporation’s breakeven revenues for 2013, if variable costs were 50% of revenues. (2 Points)
3. Calculate Aranguez Corporation’s margin of safety as a percent of sales assuming that variable costs have been reduced to 50% of sales. (2 Points)
4. Given Giselle James’s comments, what should Lester Saline do? Be sure to refer to the IMA’s Ethical Guidance which is presented on pages 23 of the course text. (9 Points)
   1. List the stakeholders in this decision
   2. Describe how each concept in the IMA’s Ethical Guidance applies to the ethical question presented here.
   3. Describe what Lester Saline should do in response to Giselle James’ request.

Answer 1

REVENUES	8000000
VC	4800000
FC	3000000
Operating income	200000
reduce	50%	of revenues
Ques 1
revenues	8000000
Variable costs	4800000
Contribution	3200000
contribution margin	40%
Breakeven = Fxied costs/contribution margin
breakeven = 1728000/40%
breakeven=		$        7,500,000
Ques 2
If variable costs are	50%	of revenues
then contribution margin is	50.00%
contribution margin	50%
Breakeven = Fxied costs/contribution margin
breakeven = 1728000/40%
breakeven=		$        6,000,000
Ques 3
REVENUES	$        8,000,000
VC	$        4,000,000
FC	$        1,728,000
Operating income	$        2,272,000
Ques 4
Incorrect reporting of environmental costs with the goal of continuing operations is unethical. In assessing the situation, the specific Standards of Ethical Conduct for Management Accountants that the management accountant should consider are listed below.
Clear reports using relevant and reliable information should be prepared. Preparing reports on the basis of incorrect environmental costs to make the company’s performance look better than it is violates competence standards. It is unethical for Saline not to report environmental costs to make the plant’s performance look good.
The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Saline may be tempted to report lower environmental costs to please james and dall and save the jobs of his colleagues. This action, however, violates the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information.
The management accountant’s Standards of Ethical Conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant’s standpoint, underreporting environmental costs to make performance look good would violate the standard of objectivity.
Saline should indicate to james that estimates of environmental costs and liabilities should be included in the analysis. If james still insists on modifying the numbers and reporting lower environmental costs, Saline should raise the matter with one of james’s superiors. If after taking all these steps, there is continued pressure to understate environmental costs, Saline should consider resigning from the company and not engage in unethical behavior.