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Kaplan University Incremental and Management Decision Analysis

Kaplan University Incremental and Management Decision Analysis

Kaplan University Incremental and Management Decision Analysis


Discussion Topic 1: Ethics

This week’s Discussion topic is an Ethics case. Please read the casebelow (Ethics Case CT7.5) and respond to the questions that follow:

Blake Romney became Chief Executive Officer of Peters Inc. two yearsago. At the time, the company was reporting lagging profits, and Blakewas brought in to “stir things up.” The company has three divisions,electronics, fiber optics, and plumbing supplies. Blake has no interestin plumbing supplies, and one of the first things he did was to putpressure on his accountants to reallocate some of the company’s fixedcosts away from the other two divisions to the plumbing division. Thishad the effect of causing the plumbing division to report losses duringthe last two years; in the past it had always reported low, butacceptable, net income. Blake felt that this reallocation would shine afavorable light on him in front of the board of directors because itmeant that the electronics and fiber optics divisions would look likethey were improving. Given that these are “businesses of the future,” hebelieved that the stock market would react favorably to theseincreases, while not penalizing the poor results of the plumbingdivision. Without this shift in the allocation of the fixed costs, theprofits of the electronics and fiber optics divisions would not haveimproved. Now the board of directors has suggested that the plumbingdivision be closed because it is reporting losses. This would mean thatnearly 500 employees, many of whom have worked for Peters their wholelives, would lose their jobs.

  1. If a division is reporting losses, does that necessarily mean that it should be closed?
  2. Was the reallocation of fixed costs across divisions unethical?
  3. What should Blake do?

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