Ethical Issues Involving RevenueRecognition Flash Newton is national sales direc

Question

Ethical Issues Involving RevenueRecognition

           Flash Newton is national sales director at Bright & ShinyToothpaste Company. The firm manufactures and distributes a fullline of premium-price personal care products sold through acarefully selected set of distributors nationwide. The popularityand profit margins of the Bright & Shiny product line makedistributorships very profitable and there is intense competitionwhen one becomes available.

              Flash, and the regional sales directorsworking for him, are compensated by a base salary and a significantbonus tied to percentage increases in yearly sales. Because of animpending recession, sales have been mostly flat during the firstthree quarters of the year. On October 3, Flash convened a nationalsales meeting with representatives of all distributors. At thatmeeting, he presented the distributors with Bright &Shiny’s newest sales plan. All distributors would be requiredto buy, during the 4th quarter, up to 2 years’worth of inventory of the firms’ products. Further, theprices charged on these special purchases would be 10% greater thanusual. Any distributors not agreeing to the proposal wouldautomatically lose their distributorship. Because most distributorsare not expected to have cash readily available to pay for theseadditional purchases under the usual 30-day credit terms, Bright& Shiny will allow up to 12 months to pay.

               The new policy has been a huge success and by year end, totalorders and shipments to distributors are up by 12% over theprevious year. Bright & Shiny recorded all shipments as revenueeven though some distributors were told by lower-level managersthat they could return unsold products. Because many distributorscould not handle the large shipments in their usual storagefacilities, many orders have been shipped to third-party warehousesfor storage at Bright & Shiny’s expense. At Flash’ssuggestion, and to obtain maximum benefit of this new salesprogram, the company held the books open for a few days afterDecember 31 to obtain and ship additional orders.

           Required: Identify and explain any problems you see withthe sales plan. If you were Bright & Shiny’s CEO, whichaspects of the sales plan would you have approved and which wouldyou have denied. Why? .

Explanation / Answer

The problems in the above sales plan :

The impending recession would see a decrease in the quantitydemanded of the company’s products.

This would result in high carrying costs of inventory.

If the impending recession continues , the lower level managerswould ultimately return the goods to the distributors.

The company might lose a good sales network.

Aspects of sales plans which meet approval :

Giving 12 months to pay.

Aspects of Sales plan which do not meet approval:

1 Increasing the sales price by 10%. This rise would ultimatelypass on to the customer who could altogether avoid buying theproduct in this period of recession.

2 Forcing the distributor to buy the product at the increasedprice .

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