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Joy Reed, a district manager, performance evaluation and reward is
made on the basis of adhering to the confines of a flexible budget.
Joy, the assistants, and operation managers are all eligible to receive
a bonus if actual district net operating income is between budgeted
net operating income and 130 per cent of the net operating income.
The bonuses are based on a fixed percentage of actual net operating
income. Net operating income greater than 130 per cent of budgeted
net operating income earn a bonus at the 130 per cent level (in short,
there is an upper limit on bonus payments). If actual net operating
income is less than budgeted net operating income, no bonuses are
awarded. Consider actions taken by Joy:
1. Joy overestimates expenses and underestimates revenues.
This increases the chances of the district in reaching the
budgeted net operating income. Joy believes the action is
okay, because it increases the probability of receiving bonuses
and helps keep the managers morale high.
2. Near fiscal year end, Joy sees the district will not achieve
budgeted net operating income. So, she tells the sales group to
defer the closing several sales agreements to the next fiscal
year. She also wrote off inventory which was worthless.
Deferring revenues to following year and writing off inventory
in a no-bonus year increases the probability of a bonus for next
3. Make the assumption that towards the end of the year, Joy
sees actual net operating income will exceed the 130 per cent
limit and she takes actions similar to those described in Item b.
Although there are ethical issues to address, there are additional
concerns impacted by ethical lapses in decision making, such as the
budgeting and impact on the various parts of the organization, or the
The following are required for discussion:
Discuss Joy’s ethical behavior; are her actions right or wrong?
What role does the company play in enabling the actions taken
If you are the marketing manager for the district, and receive
instructions to defer closing of sales until the next fiscal year,
what would you do?
If you are the operations manager, and know your budget has
been padded by the district manager and the padding is
common knowledge among other operations managers, who
support it because it increases the probability of coming under
budget and receiving a bonus, what would you do?
If you are the district controller, and receive instructions from
the district manager to accelerate the recognition of expenses
which legitimately belong to a future period, what would you