Critical Thinking: Chapter 2

Overview: These problems are meant to encourage deeper thinking on the material presented in the textbook. You are to answer ALL questions presented in the problem using the knowledge you have gained throughout the textbook. However, do not simply repeat what is in the book. Use that information and interpret it the best you can to apply it to the situation.

Requirements: Review the information and questions below. Provide a detailed 4-5 sentence explanation on how you would solve the problem or issue, based not only on the readings in the chapter, but your own personal experience and/or any additional outside research you perform. If quoting a source directly, make sure to cite that source, but do not rely solely on quoted materials.

Issue: Metal Creations, Inc., is a custom manufacturer that uses a job order costing system. Currently, Metal Creations has 35% excess capacity in its factory. Charlie Rollins, the president, has instituted a campaign to obtain new customers. Rollins has offered the salespeople a bonus equal to 25% of the gross profit on work for new customers. The average gross profit rate has been 30% of the contract price. Steve Starling, the sales manager for Metal Creations, wants to submit a proposal to a new customer that undercuts the usual pricing structure by 30%. As a result, this job would have no gross profit using the regular job order costing system. Instead, Starling suggests that the overhead rate applied to this job should be only 40% of the normal overhead rate, resulting in a gross profit of 28%. Starling suggests that the controller should handle this contract herself, and that no one else in the organization should know about it, especially the other salespeople, because the creative approach to overhead application might create problems

Questions to be Answered:

1) Does taking an order at a significantly reduced price create an ethical problem?

2) Does altering the accounting for a particular order create an ethical problem?

3) Does asking the controller to handle the contract and keep the accounting confidential create an ethical problem?