Reference no: EM132633276

You are the Division A controller for Company A Baked Goods Company. Company A recently introduced a new chocolate chip muffin brand called Plenti-O-Chips, which has more than twice as many chips as any other brand on the market. The brand has quickly become a huge market success, largely because of the number of chips in each muffin. As a result of the brand's success, the product manager who launched the Plenti-O-Chips brand has been promoted to division vice president. A new product manager, Ellen, has been brought in to replace the promoted manager.

• At Company A, product managers are evaluated on both the sales and profit margin of the products they manage. During her first week on the job, Ellen notices that the Plenti-O-Chips muffin uses a lot of chips, which increases the cost of the muffin. To improve the product's profitability, Ellen plans to reduce the amount of chips per muffin by 10%. She believes that a 10% reduction in chips will not adversely affect sales, but will reduce cost and, hence, help her improve the profit margin. Ellen is focused on profit margins, because she knows that if she is able to increase the profitability of the Plenti-O-Chips brand, she will be in line for a big promotion.

• To confirm this plan, Ellen has enlisted you to help evaluate it. After reviewing the cost of production reports segmented by cookie brand, you notice that there has been a continual drop in the materials costs for the Plenti-O-Chips brand since its launch. On further investigation, you discover that chip costs have declined because the previous product manager continually reduced the number of chips in each muffin. Both you and Ellen report to the division vice president, who was the original product manager for the Plenti-O-Chips brand who was responsible for reducing the chip count in prior periods.

Question 1: Is this an ethical strategy for Ellen to pursue? What are the potential implications of this strategy?

Question 2: What options might you, as the controller, consider taking in response to Ellen's plan?