Question

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

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

Short answer

1. The breakeven sales and operating income are fixed at a low level. If it rejects the break-even point to great extent then president may reject the sales commission proposal.
2. The error made by the intern could be incidental but not informing about that could be unethical.
3. If the controller already knew about the analysis, then the consequences will not be as feared by the intern. The controller should take the responsibility for the error.
4. Information should be shared with the controllers, as it will preserve the integrity, and honesty.

Step-by-step solution

Part 1

In this case, the fixed cost was understated by overlooking the sales manager’s monthly salary amounting to $2,800, the breakeven sales are fixed at a low level. But, if the actual fixed cost was taken into the consideration, then the breakeven sales level will be much higher.

If the fixed selling cost is considered a major expense for the company, then it will affect the break-even point to a great extent, in that case, the president should think to reject the sales commission proposal

Part 2

The error of overlooking the salaries of the sales personnel while computing the breakeven point and the operating income of the company is made by an intern who has come for the job this summer at the company. The error is truly incidental or unintentional, hence this will not be considered unethical. But the intern could be questioned about his competency.

The action of not reporting this matter of error to the controller is not ethical, as this is a misinterpretation of the facts of the company.

Step 3Part 3

If the intern would have reported the error to the controller, then the consequences may not be as bad as the intern feared. He might not have initiated the action as per the analysis made by the intern.

The controller should also take some responsibility as he has not checked the analysis made by the intern before taking the action.

The controller should have informed or given the guidelines to the intern and advised about the cost data that he should take into consideration for analysis.

Step 4Part 4

After taking into consideration all the factors, Intern should inform about errors to the controller because of the following reasons:

• The intern can feel guilty, in case if the error goes undetected
• In this way, the intern can preserve his integrity
• Intern can also prove their honesty and quality by admitting the errors