Profitability versus social conscience (effects of cost behavior) Advances in biological technology have enabled two research companies, Bio Labs, Inc., and Scientific Associates, to develop an insect-resistant corn seed. Neither company is financially strong enough to develop the distribution channels necessary to bring the product to world markets. World Agra Distributors, Inc., has negotiated contracts with both companies for the exclusive right to market their seed. Bio Labs signed an agreement to receive an annual royalty of $1,000,000. In contrast, Scientific Associates chose an agreement that provides for a royalty of $0.50 per pound of seed sold. Both agreements have a 10-year term. During 2004, World Agra sold approximately 1,600,000 pounds of the Bio Labs, Inc., seed and 2,400,000 pounds of the Scientific Associates seed. Both types of seed were sold for $1.25 per pound. By the end of 2004, it was apparent that the seed developed by Scientific Associates was superior. Although insect infestation was virtually nonexistent for both types of seed, the seed developed by Scientific Associates produced corn that was sweeter and had consistently higher yields. World Agra Distributors’ chief financial officer, Roger Weatherstone, recently retired. To the astonishment of the annual planning committee, Mr. Weatherstone’s replacement, Ray Borrough, adamantly recommended that the marketing department develop a major advertising campaign to promote the seed developed by Bio Labs, Inc. The planning committee reluctantly approved the recommendation. A $100,000 ad campaign was launched; the ads emphasized the ability of the Bio Labs seed to avoid insect infestation. The campaign was silent with respect to taste or crop yield. It did not mention the seed developed by Scientific Associates. World Agra’s sales staff was instructed to push the Bio Labs seed and to sell the Scientific Associates seed only on customer demand. Although total sales remained relatively constant during 2005, sales of the Scientific Associates seed fell to approximately 1,300,000 pounds while sales of the Bio Labs, Inc., seed rose to 2,700,000 pounds.
a. Determine the amount of increase or decrease in profitability experienced by World Agra in 2005 as a result of promoting Bio Labs seed. Support your answer with appropriate commentary.
b. Did World Agra’s customers in particular and society in general benefit or suffer from the decision to promote the Bio Labs seed?
c. Review the standards of ethical conduct in Exhibit 1.15 of Chapter 1 and comment on whether Mr. Borrough’s recommendation violated any of the standards in the code of ethical conduct.
d. Comment on your belief regarding the adequacy of the Standards of Ethical Conduct for Managerial Accountants to direct the conduct of management accountants.
e. Are the actions of Ray Borrough in violation of the provisions of Sarbanes-Oxley that were described in Chapter 1? Explain your answer.