Chapter 8, Problem 8.7BYP

Ethics Case 8–7

Profit manipulation

• LO8–4

In 2017 the Moncrief Company purchased from Jim Lester the right to be the sole distributor in the western states of a product called Zelenex. In payment, Moncrief agreed to pay Lester 20% of the gross profit recognized from the sale of Zelenex in 2018.

Moncrief uses a periodic inventory system and the LIFO inventory method. Late in 2018, the following information is available concerning the inventory of Zelenex:

Beginning inventory, 1/1/2018 (10,000 units @ $30)	$ 300,000
Purchases (40,000 units @ $30)	1,200,000
Sales (35,000 units @ $60)	2,100,000

By the end of the year, the purchase price of Zelenex had risen to $40 per unit. On December 28, 2018, three days before year-end, Moncrief is in a position to purchase 20,000 additional units of Zelenex at the $40 per unit price. Due to the increase in purchase price, Moncrief will increase the selling price in 2019 to $80 per unit. Inventory on hand before the purchase, 15,000 units, is sufficient to meet the next six months’ sales and the company does not anticipate any significant changes in purchase price during 2019.

Required:

1. Determine the effect of the purchase of the additional 20,000 units on the 2018 gross profit from the sale of Zelenex and the payment due to Jim Lester.

2. Discuss the ethical dilemma Moncrief faces in determining whether or not the additional units should be purchased.