Reference no: EM132624856

Jiambalvo Case 1-2: oswell Plumbing Products produces a variety of valves, connectors, and fixtures used in commercial and residential plumbing applications. Recently a senior manager walked into the cost accounting department and asked Nick Somner to tell her the cost of the D45 valve. Nick quickly replied, "Why do you want to know?" Noticing that the manager appeared somewhat startled by this question, he explained, "The cost information you need depends on the decision you're going to make. You might be thinking of increasing a scheduled production run of 3,000 D45s by 100 units or scheduling an additional production run, or you might even be thinking of dropping the product. For each of these decisions, the cost information that you need is different."

Question 1: Using the concept of incremental analysis, expand on Nick's response of, "Why do you want to know?" What cost information would be relevant to a decision to drop the product that would not be relevant to a decision to increase a production run by 100 units?

Jiambalvo Case 2-1: Brixton Surgical Devices, a public company with sales of over $900,000,000, is one of the world's largest producers of surgical clamps, saws, screws, and stents. Its business involves production of both stock items and custom pieces for doctors at research hospitals.

At the end of the third quarter of 2017, it became clear to Ed Walters, chief operating officer, and Robin Smith, chief financial officer, that the company would not make the aggressive annual earnings target specified by the board of directors. In consequence, Ed and Robin would not receive bonuses, which historically had averaged about 35 percent of their base compensation. The two devised the following strategy.

"Here's what we'll do," suggested Ed. "We've never offered our customers a discount. Let's change that right now. We'll offer a 25 percent discount on all orders placed in October and November for delivery in December of 2017."

"That will certainly boost fourth-quarter sales," said Robin. "But you know, it won't really increase total sales. It'll just transfer some sales from the first quarter of 2018 to the fourth quarter of 2017. Of course, 2017 is where we need earnings to hit our bonus target. Hey, I've got another idea. We can also jack up production of our stock items in the fourth quarter. With our high-priced production equipment, we've got a ton of overhead. But the more we produce, the more overhead we can bury in inventory. With lower unit costs and higher sales, profit will go way up. Let's get going on execution. I've got to get the marketing people working on the promotion, and you've got to update the production schedule. This could end up being our best year ever in terms of bonuses!"

Question 2: Are the proposed actions of Ed and Robin ethical? What is the likely effect of their actions on shareholder value?