Managerial accountants must perform their work objectively and ethically. Learning to question,

analyze, and objectively look at data and evidence is a decided necessity for the professional in

this field.

Topic: Ethics

Please read the case below $($Ethics Case CT$7\mathrm{.}5)$ and respond to the questions that follow:

Blake Romney became Chief Executive Officer of Peters Inc. two years ago. At the time, the

company was reporting lagging profits, and Blake was brought in to "stir things up$."$ The company

has three divisions: electronics, fiber optics, and plumbing supplies. Blake has no interest in

plumbing supplies, and one of the first things he did was to put pressure on his accountants to

reallocate some of the company's fixed costs away from the other two divisions to the plumbing

division. This had the effect of causing the plumbing division to report losses during the last two

years; in the past it had always reported low, but acceptable, net income. Blake felt that this

reallocation would shine a favorable light on him in front of the board of directors because it

meant that the electronics and fiber optics divisions would look like they were improving. Given

that these are "businesses of the future," he believed that the stock market would react favorably

to these increases, while not penalizing the poor results of the plumbing division. Without this

shift in the allocation of the fixed costs, the profits of the electronics and fiber optics divisions

would not have improved. Now the board of directors has suggested that the plumbing division be

closed because it is reforting losses. This would mean that nearly $500$ employees, many of whom

have worked for Peters their whole lives, would lose their jobs.

How can cost allocation methods of fixed costs affect the profitability$/$unprofitability of a

product or division?

Was Blake's request to his accountants ethical? Why or why not?

What would be the consequences to the future profitability of the remaining divisions if the

plumbing division were eliminated?

How would you explain this to Blake?