Case 2-1

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CASE 2-1
Ed Walters & Robin Smith from Brixton surgical Devices plan to increase inventory and give discounts of 25% discounts is unethical in this case because this plan is executed for their own good to gain bonuses not for the company’s interest.
What they did will certainly decrease overhead cost by distributing it among inventory stock but in the balance sheet it will show that the inventory is more than the cash and so the quick ratio will be very low, and the increase in production means an increase in material and labor hours and machine hours therefor there is an increased cost here. On the other hand when they will give the 25% discount on orders placed in October and November for delivery in December this doesn’t guarantee the increase in sales and if sales does increase this will certainly affect first quarter of next year sales negatively, and with a company that never gave discounts before 25% is a big percentage. Another dilemma is that the production should follow the market demand not the other way round with their strategy the production might be too large for the demand, if they follow the JIT (just in time) production process they will save a lot of money on the inventory stock
The shareholders objective is focused on the company’s interest and in long term profit but what Ed and Robin did is a short term benefit which leads to increasing their bonus for this year (you get what you measure) and a decision of giving discount should come through several series of approvals not only management decision. These actions will eventually affect the balance sheet and income statement and when it does the shareholders won’t be happy, so it might lead to them losing their jobs instead. This is a classic case of agency theory where the interest of management is not aligning with the shareholders objective and here comes the role of the board of directors…...

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