Cooper Huntington is the manager of the upstate store of a large retailer of farm products. His company is a stable, consistently profitable member of the farming industry. The upstate store is doing fine despite severe drought conditions in the area. At the first of the year, corporate headquarters set a targeted return on investment for the store of 20 percent. The upstate store currently averages $140,000 in invested assets (beginning invested assets, $130,000; ending invested assets, $150,000) and is projected to have an operating income of $30,800. Huntington is considering whether to take one or both of the following actions before year end:
? Hold off recording and paying $5,000 in bills owed until the start of the next fiscal year.
? Write down $3,000 in store inventory (nonperishable emergency flood supplies) to zero value because Huntington was unable to sell the items all year. Currently, Huntington’s bonus is based on store profits. Next year, corporate headquarters is changing its performance incentive program so that bonuses will be based on a store’s actual return on investment.
1. What effect would each of Huntington’s possible actions have on the
store’s operating income this year? (Hint: Use Figure 4 in this chapter to trace the effects.) In your opinion, is either action unethical?
2. Independent of question 1, if corporate headquarters changes its performance incentive plan for store managers, how will the inventory write-down affect next year’s income and return on investment if the items are sold for $4,000 next year? In your opinion, does Huntington have an ethical dilemma?
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