FDP Company produces a variety of home security products Gar

FDP Company produces a variety of home security products. Gary Price, the company\'s president, is concerned with the fourth quarter market demand for the company\'s products. Unless something is done in the last two months of the year, the company is likely to miss its earnings expectation of Wall Street analysts. Price still remembers when FDP\'s earnings were below analysts\' expectation by two cents a share three years ago, and the company\'s share price fell 19% the day earnings were announced. In a recent meeting, Price told his top management that something must be done quickly. One proposal by the marketing vice president was to give a deep discount to the company\'s major customers to increase the company\'s sales in the fourth quarter. The company controller pointed out that while the discount could increase sales it may not help the bottom line: to the contrary, it could lower income. The controller said, \"Since we have enough storage capacity, we might simply increase our production in the fourth quarter to increase our reported profit.\" Discussion Questions: 1. Gary Price is not sure how the increase in production without a corresponding increase in sales could help boost the company\'s income. Explain to Price how reported income varies with respect to production level. 2. Is there an ethical concern in this situation? If so. which parties are affected? Explain

Solution

1. Gary Price\'s concern about increased production without a corresponsing increase in sales not boosting company income is absolutely valid. It will not boost the real income of the company. However, the cost of goods sold of the company is calculated by adding the opening stock and purchases and deducting the closing stock. Thus, increase in closing stock will result in decrease in the cost of goods sold which will increase the profit of the company.

2. The method of increasing production to increase profits is unethical as it dresses the books to an optimal scenario while the actual situation is different. The investors and creditors of the company shall be affected by this as they will take their decisions regarding the company based on the dressed up financial statements.