Jason Kemp was torn between conflicting emotions. On the one hand, things were going so well. He had just completed 6 months as the assistant financial manager in the Electronics Division of Med-Products Inc. The pay was good, he enjoyed his coworkers, and he felt that he was part of a team that was making a difference in American health care. On the other hand, his latest assignment was causing some sleepless nights. Mel Cravens, his boss, had asked him to “refine” the figures on the division’s latest project—a portable imaging device code—named ZM. The original estimates called for investment of $15.6 million and projected annual income of $1.87 million. Med-Products required an ROI of at least 15% for new project approval. So far, ZM’s rate of return was nowhere near that hurdle rate. Mel encouraged him to show increased sales and decreased expenses in order to get the projected income above $2.34 million. Jason asked for a meeting with Mel to voice his concerns. Jason: Mel, I’ve gone over the figures for the new project and can’t find any way to get the income above $1.9 million. The salespeople have given me the most likely revenue figures, and production feels that the expense figures are solid. Mel: Jason, those figures are just projections. Sales doesn’t really know what the revenue will be. In fact, when I talked with Sue Harris, our sales vice president, she said that sales could range from $1.5 million to $2.5 million. Use the higher figure. I’m sure this product will justify our confidence in it! Jason: I know the range of sales was that broad, but Sue felt the $2.5 million estimate was pretty unlikely. She thought that during the first 5 years or so that ZM sales would stay in the lower end of the range. Mel: Again, Sue doesn’t know for sure. She’s just estimating. Let’s go with the higher estimate. We really need this product to expand our line and to give our division a chance to qualify for sales-based bonuses. If ZM sells at all, our revenue will go up, and we’ll all share in the bonus pool! Jason: I don’t know, Mel. I feel pretty bad signing off on ROI projections that I have so little confidence in. Mel: (frustrated) Look, Jason, just prepare the report. I’ll back you up. 1) CONCEPTUAL CONNECTION Do you agree that Jason has an ethical dilemma? Explain. Is there any way that Mel could ethically justify raising the sales estimates and/or lowering expense estimates?
Jason Kemp was torn between conflicting emotions. On the one hand, things were going so well. He had just completed 6 months as the assistant
Jason: Mel, I’ve gone over the figures for the new project and can’t find any way to get the income above $1.9 million. The salespeople have given me the most likely revenue figures, and production feels that the expense figures are solid.
Mel: Jason, those figures are just projections. Sales doesn’t really know what the revenue will be. In fact, when I talked with Sue Harris, our sales vice president, she said that sales could range from $1.5 million to $2.5 million. Use the higher figure. I’m sure this product will justify our confidence in it!
Jason: I know the range of sales was that broad, but Sue felt the $2.5 million estimate was pretty unlikely. She thought that during the first 5 years or so that ZM sales would stay in the lower end of the range.
Mel: Again, Sue doesn’t know for sure. She’s just estimating. Let’s go with the higher estimate. We really need this product to expand our line and to give our division a chance to qualify for sales-based bonuses. If ZM sells at all, our revenue will go up, and we’ll all share in the bonus pool!
Jason: I don’t know, Mel. I feel pretty bad signing off on ROI projections that I have so little confidence in.
Mel: (frustrated) Look, Jason, just prepare the report. I’ll back you up.
1) CONCEPTUAL CONNECTION Do you agree that Jason has an ethical dilemma? Explain. Is there any way that Mel could ethically justify raising the sales estimates and/or lowering expense estimates?
ANSWER:-
Yes, Jason has an ethical dilemma. He is being asked to "refine" the figures on the division's latest project-a portable imaging device code-named ZM. The original estimates called for investment of $15.6 million and projected annual income of $1.87 million. Med-Products requires an ROI of at least 15% for new project approval. So far, ZM's rate of return is nowhere near that hurdle rate. Mel Cravens, his boss, has encouraged him to show increased sales and decreased expenses in order to get the projected income above $2.34 million. There are several potential ways that Mel could ethically justify raising the sales estimates and/or lowering expense estimates. First, Mel could argue that the sales figures are just projections, and that sales doesn't really know what the revenue will be. In fact, when Mel talked with Sue Harris, the sales vice president, she said that sales could range from $1.5 million to $2.5 million. Mel could argue that it is reasonable to use the higher figure, since it is within the range of possibilities.
Second, Mel could argue that the expense figures are also just projections, and that production doesn't really know what the expenses will be. In fact, when Mel talked with the production manager, he said that expenses could range from $1.2 million to $1.6 million. Mel could argue that it is reasonable to use the lower figure, since it is within the range of possibilities.
Third, Mel could argue that the ZM project is important for the division, and that it is worth taking a risk in order to get the project approved. Mel could argue that the division needs the ZM project in order to expand its line and to give its division a chance to qualify for sales-based bonuses. If ZM sells at all, the division's revenue will go up, and everyone will share in the bonus pool.
Fourth, Mel could argue that Jason should have confidence in the ZM project, because it is a good product that will justify the investment. Mel could argue that the ZM project is a good product that will help the division expand its line and that it is worth taking a risk in order to get the project approved
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