Chapter 5, Problem 70C

Morelli Electric Motor Corporation’s controller, Erin Jackson, developed new product costs for the standard, deluxe, and heavy-duty models using activity-based costing. It was apparent that the firm’s traditional product-costing system had been under costing the deluxe-model electric motor by a significant amount. This was due largely to the low volume of the deluxe-model motor. Before she could report back to the president, Jackson received a phone call from her friend, Alan Tyler. He was the production manager for the deluxe-model electric motor. Tyler was upset, and he let Jackson know it. “Erin, I’ve gotten wind of your new product-cost analysis. There’s no way the deluxe model cost’s anywhere near what your numbers say. For years and years, this line has been highly profitable, and its reported product cost was low. Now you’re telling us it costs more than twice what we thought. I just don’t buy it.”

Jackson briefly explained to her friend about the principles of activity-based costing and why it resulted in more accurate product costs. “Alan, the deluxe model is really losing money. It simply has too low a volume to be manufactured efficiently.”

Tyler was even more upset now. “Erin, if you report these new product costs to the president, he’s going to discontinue the deluxe model. My job’s on the line, Erin! How about massaging those number’s a little bit. Who’s going to know?”

“I’ll know, Alan. And you’ll know,” responded Jackson. “Look, I’ll go over my analysis again, just to make sure I haven’t made an error.”

Required:

Discuss the ethical issues involved in this scenario.

1. 1. Is the controller, Erin Jackson, acting ethically?
2. 2. Is the production manager, Alan Tyler, acting ethically?
3. 3. What are Jackson’s ethical obligations? To the president? To her friend?