Asked by Sakina Pervez on Jun 11, 2024
Verified
Hanson Inc. requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products or expansions of a product line.
Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at $100000 and a variable cost of $5. Since the selling price is only $15 for the proposed product 10000 units would need to be sold to break even. That is approximately twice the volume estimate for the first year. She shares her dismay with Patti Patterson another manager.
Patti strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs the project appears viable.
Required:
1. Who are the stakeholders in this decision?
2. Is it ethical for Nancy to revise the costs as indicated? Briefly explain.
3. What should Nancy do?
Cost-volume-profit
An analysis to determine how changes in costs and volume affect a company's operating income and net income.
Fixed Costs
Costs that do not change in total despite fluctuations in the volume of goods or services produced or sold.
Variable Costs
Charges that fluctuate according to the degree of business operations.
- Understand the concept of fixed, variable, and mixed costs and their implications in cost-volume-profit analysis.
- Identify and analyze stakeholders in business decisions involving cost assessments.
- Assess the ethical implications of financial decision-making in managerial accounting.
Verified Answer
AS
Ashikin ShukriJun 12, 2024
Final Answer :
1. The stakeholders include:
Nancy Stephens
Hanson Inc.
Hanson's customers
2. It is ethical to revise the costs certainly. The only problem that exists is the failure to account for the fixed cost component of the step and mixed costs. At low volume levels such as those anticipated for this project the project is likely to be less profitable than forecast. To the extent that Nancy is submitting misleading figures in order to get her project approved she is behaving unethically.
3. Nancy should try to make the forecasts as accurate as possible by making a better determination of cost behavior. If that is not possible within the time she has, she should submit both sets of figures, and let the selection committee make its determination.
Nancy Stephens
Hanson Inc.
Hanson's customers
2. It is ethical to revise the costs certainly. The only problem that exists is the failure to account for the fixed cost component of the step and mixed costs. At low volume levels such as those anticipated for this project the project is likely to be less profitable than forecast. To the extent that Nancy is submitting misleading figures in order to get her project approved she is behaving unethically.
3. Nancy should try to make the forecasts as accurate as possible by making a better determination of cost behavior. If that is not possible within the time she has, she should submit both sets of figures, and let the selection committee make its determination.
Learning Objectives
- Understand the concept of fixed, variable, and mixed costs and their implications in cost-volume-profit analysis.
- Identify and analyze stakeholders in business decisions involving cost assessments.
- Assess the ethical implications of financial decision-making in managerial accounting.