5.4 ETHICS CASE: PERFORMANCE MEASURESAdapted from Textbook Problem 18-32Bill Fremont, division controller and CMA, was upset by a recent memo he received from thedivisional manager, Steve Preston. Bill was scheduled to present the division's financialperformance at headquarters in one week. In the memo, Steve had given Bill some instructionsfor this upcoming report. In particular, Bill had been told to emphasize the significantimprovement in the division's profits over last year. Bill, however, didn't believe that there wasany real underlying improvement in the division's performance and was reluctant to sayotherwise. He knew that the increase in profits was because of Steve's conscious decision toproduce more inventory.In an earlier meeting, Steve had convinced his plant managers to produce more than they knewthey could sell. He argued that by deferring some of this period's fixed costs, reported profitswould jump. He pointed out two significant benefits. First, by increasing profits, the divisioncould exceed the minimum level needed so that all the managers would qualify for the annualbonus. Second, by meeting the budgeted profit level, the division would be better able tocompete for much-needed capital. Bill objected but had been overruled. The most per-suasivecounterargument was that the increase in inventory could be liquidated in the coming year asthe economy improved. Bill, however, considered this event unlikely. From past experience, heknew that it would take at least two years of improved market demand before the productivecapacity of the division was exceeded.Required:1. Discuss the behavior of Steve Preston, the divisional manager. Was the decision to produce forinventory an ethical one?2. What should Bill Fremont do? Should he comply with the directive to emphasize the increasein profits? If not, what options does he have?3. Identify any standards from the IMA Statement of Ethical Professional Practice that apply inthis situation. Discuss.

Business ethics is the study of morality in the business world. It involves questions about the…

Answered: 1. Discuss the behavior of Steve…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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