3. By setting a production schedule that will maximize his division’s net op-
erating income—and maximize his own bonus—Mr. Cavalas will be acting
against the best interests of the company as a whole. The extra units
aren’t needed and will be expensive to carry in inventory. Moreover,
there is no indication that demand will be any better next year than it
has been in the current year, so the company may be required to carry
the extra units in inventory a long time before they are ultimately sold.
The company’s bonus plan undoubtedly is intended to increase the
company’s profits by increasing sales and controlling expenses. If Mr.
Cavalas sets a production schedule as shown in part (2) above, he will
obtain his bonus as a result of producing rather than as a result of sell-
ing. Moreover, he will obtain it by creating greater expenses—rather
than fewer expenses—for the company as a whole.
In sum, producing as much as possible so as to maximize the division’s
net operating income and the manager’s bonus would be unethical be-
cause it subverts the goals of the overall organization.
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
Solutions Manual, Chapter 7 377
Problem 7-17 (75 minutes)
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