Management bonus equal to percentage of operating income

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Reference no: EM131258708

The Precision Parts Corporation manufactures automobile parts. The company has reported a profit every year since the company's inception in 1977. Management prides itself on this accomplishment and believes one important contributing factor is the company's incentive plan that rewards top management a bonus equal to a percentage of operating income if the operating income goal for the year is achieved. However, 2003 has been a tough year, and prospects for attaining the income goal for the year are bleak.

Tony Smith, the company's chief financial officer, has determined a way to increase December sales by an amount sufficient to boost operating income over the goal for the year and earn bonuses for all top management. A reputable customer ordered $120,000 of parts to be shipped on January 15, 2004. Tony told the rest of top management "I know we can get that order ready by December 31 even though it will require some production line overtime. We can then just leave the order on the loading dock until shipment. I see nothing wrong with recognizing the sale in 2003, since the parts will have been manufactured and we do have a firm order from a reputable customer." The company's normal procedure is to ship goods f.o.b. destination and to recognize sales revenue when the customer receives the parts.

What is the ethical dilemma in this case? If you were the manager, how would you approach this issue?

Reference no: EM131258708

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