Bjorn and Karl work as product managers for a medium-sized manufacturing firm in Cologne, Germany. Both are evaluated on their respective product’s reported profit and are given considerable autonomy in terms of production methods, distribution, and pricing.
Their firm has adopted a strategy of automating the production process as much as possible. Yet, as it has done for many years, the firm continues to allocate all overhead to individual products based on the number of labor hours consumed by each product.
During drinks one evening, Bjorn and Karl started talking shop. Bjorn complained that the allocation mechanism penalizes his product line because of its high labor content. Karl laughed and said, “There is an easy way to fix that problem! Start buying more components from suppliers instead of making them yourself.”

Required:
a. Evaluate the merits of the firm’s choice to continue allocating overhead based on labor hours, although the strategy is to foster automation. What is the impact on the accuracy of reported product cost? What countervailing benefits, if any, does the allocation mechanism provide?
b. How does Karl’s recommended strategy reduce the amount of overhead allocated to Bjorn’s product line?
c. Suppose Bjorn follows Karl’s advice. Will the firm’s overall expenditure on overhead costs increase, decrease, or stay about the same? What about the firm’s total costs, which includes the cost of materials and labor?
d. Does Karl’s recommended course of action fall within the norms for ethical behavior? Why or why not?