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, Sasha Korablina, asks you to compute
(1) The new break-even 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 break-even sales.
The following week, you realize that you made an error in the CVP analysis. You 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 Korablina 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 break-even 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 Korablina of the error in your analysis. Why might the consequences not be as bad as you fear? Should Korablina take any responsibility for your error? What could Korablina have done differently?
4. After considering all of the factors, should you inform Korablina or simply keep quiet?