Company D's top management is growing concerned that one of its divisions, Division D, will not be able to meet its current period income goals. Division D uses absorption costing for internal profit reporting and had an adequate level of inventory at the beginning of the period. Division D's manager knows that he can raise profits by increasing production at the end of the period. The increased production will allocate fixed costs over a greater number of units. This, in turn, will reduce cost of goods sold and increase earnings. However, it is unlikely that the additional production will be sold, resulting in a large ending inventory balance. The manager of Division D has come to Alfonso Yates, the divisional controller, to find out exactly how much additional production is needed to increase net income enough to meet the division's profit goals. Alfonso analyzes Division D's financial numbers and determines that the division will need to increase inventory by 25% in order to absorb enough fixed costs to meet the division's income goal. Alfonso reports this information to the Division D manager. Is Alfonso acting ethically?
Company D's top management is growing concerned that one of its divisions, Division D, will not be able to meet its current period income goals. Division D uses absorption costing for internal profit reporting and had an adequate level of inventory at the beginning of the period. Division D's manager knows that he can raise profits by increasing production at the end of the period. The increased production will allocate fixed costs over a greater number of units. This, in turn, will reduce cost of goods sold and increase earnings. However, it is unlikely that the additional production will be sold, resulting in a large ending inventory balance.
The manager of Division D has come to Alfonso Yates, the divisional controller, to find out exactly how much additional production is needed to increase net income enough to meet the division's profit goals. Alfonso analyzes Division D's financial numbers and determines that the division will need to increase inventory by 25% in order to absorb enough fixed costs to meet the division's income goal. Alfonso reports this information to the Division D manager.
Is Alfonso acting ethically?
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