It has been six years since Ron Cavender first opened Rydal Electronics Company. In that time, REC has grown to a company with 71 employees at three locations around the Philadelphia area. Ron is very proud of the company he has built.

One aspect of that is his insistence on being an ethical company and a good citizen in the community. REC regularly donates to charities in the area and sponsors children’s activities. Ron pays the employees very well compared to other companies in the area. He provides a set of benefits that allow his employees to be good citizens themselves.

Ron insists that the company treat it customers with respect as well. This means never being deceptive with pricing or overselling the customer unnecessary items. Ron personally knows all the employees and regularly visits each location. He still goes out to customer sites to oversee the work and talk to the customers.

As a result of Ron’s efforts, REC is viewed very positively by the community. Much of the sales growth has been from recommendations by existing customers to their friends and families. Ron believes REC’s reputation is one of its greatest assets and wants to protect it. He has reprimanded employees that have misled customers and even fired a sales person that did not treat customers and staff appropriately.

While Ron can evaluate the practices of his sales staff and installation employees, he is less confident in evaluating his accounting staff. Since you were one of his first advisors, he has asked you to evaluate an action taken by a member of his accounting staff to ensure that it lives up to REC ethical standards.

You have just begun your summer internship at REC. To expand sales, REC is considering paying a commission to its sales force. The controller, Mark Neter, 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 cost 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 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 Mark of your mistake, he will have to tell the president. In this case, you are afraid REC might not offer you permanent employment after your internship.

• 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?
• Consider your ethical responsibilities. Is there a difference between: (a) initially making an error and (b) subsequently failing to inform the controller?
• Suppose you tell Mark Neter of the error in your analysis. Why might the consequences not be as bad as you fear? Should Mark take any responsibility for your error? What could Mark have done differently?
• After considering all the factors, should you inform Mark or simply keep quiet?

Answer rating: 100% (QA)

Solution 1 Omitting salaries in the computation would result in understating the breakeven sales lev... View the full answer