Reference no: EM133172624

Question - You have just begun your summer internship at Harmony Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales Harmony is considering paying a commission to its sales force. The controller Matt asks you to compute (1) the new breakeven sales figure and (2) the operating profit if sales increase 15% under the new sales commission plan. He thinks you can handle it this test because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the analysis and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven.

The following week you realize that you made an error in the CVP analysis. You overlooked the sales personnel $2800 monthly salaries, and you did not include the fixed selling costs in your computations. You are not sure what to do. If you tell Matt of your mistake he will have to tell the president. In this case you are afraid Harmony Instruments might not offer you permanent employment after your internship.

Required -

1. Prepare the memo to the president of Harmony Instruments. Show the analysis that forms the basis to your decision. Use made up numbers.

2. How would your error affect break even sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales Commission proposal?

3. Consider your ethical responsibilities. Is there a difference between (a) initially making an error and (b) subsequently failing to inform the controller?

4. Suppose you tell Matt of the error in your analysis. Why might the consequences not be as bad as you fear? Should Matt take any responsibility for your error? What could be Matt have done differently?

5. After considering all the factors should you inform Matt or simply keep quiet?