Case $4-55$ Ethics and a Cost$-$Volume$-$Profit Application

Danna Lumus, the marketing manager for a division that produces a variety of paper products, is

considering the divisional manager's request for a sales forecast for a new line of paper napkins.

The divisional manager has been gathering data so that he can choose between two different

production processes. The first process would have a variable cost of $$10$ per case produced and

total fixed cost of $$100,000.$ The second process would have a variable cost of $$6$ per case and

total fixed cost of $$200,000.$ The selling price would be $$30$ per case. Danna had just completed

a marketing analysis that projects annual sales of $30,000$ cases.

Danna is reluctant to report the $30,000$ forecast to the divisional manager. She knows that

the first process would be labor intensive, whereas the second would be largely automated with

little labor and no requirement for an additional production supervisor. If the first process is cho$-$

sen$,$ Jerry Johnson, a good friend, will be appointed as the line supervisor. If the second process

is chosen, Jerry and an entire line of laborers will be laid off. After some consideration, Danna

revises the projected sales downward to $22,000$ cases.

She believes that the revision downward is justified. Since it will lead the divisional manager

to choose the manual system, it shows a sensitivity to the needs of current employees$-$a sensitivity

that she is afraid her divisional manager does not possess. He is too focused on quantitative fac$-$

tors in his decision making and usually ignores the qualitative aspects.

Required:

Compute the break$-$even point in units for each process.

Compute the sales volume for which the two processes are equally profitable. Identify the

range of sales for which the manual process is more profitable than the automated proc$-$

ess. Identify the range of sales for which the automated process is more profitable than the

manual process. Why does the divisional manager want the sales forecast?

Discuss Danna's decision to alter the sales forecast. Do you agree with it$?$ Is she acting ethi$-$

cally? Is her decision justified since it helps a number of employees retain their employment?

Should the impact on employees be factored into decisions? In fact, is it unethical not to

consider the impact of decisions on employees?