Solved: Prior to the start of fiscal 2013 managers of

MultiTech
Prior to the start of fiscal 2013 managers of MultiTech

Prior to the start of fiscal 2013, managers of MultiTech hosted a web conference for its
shareholders, financial analysts, and members of the financial press. During the conference, the
CEO and CFO released the following financial projections for 2013 to the attendees (amounts in
millions):
Sales ............. $40,000
Cost of goods sold ........ (32,000)
Gross margin ........... $ 8,000
Operating expenses ....... (4,000)
Operating income .......... $ 4,000
As had been their custom, the CEO and CFO projected confidence that the firm would achieve
these goals, even though projections had been significantly more positive than the actual results
for 2012. Not surprisingly, the day following the web conference, MultiTech’s stock rose 15
percent.
In early October 2013, the CEO and CFO of MultiTech met and developed revised projections
for fiscal 2013, based on actual results for the first three quarters of the year and projections for
the final quarter. Their revised projections for 2013 follow:
Sales ............. $ 38,000
Cost of goods sold ......... (30,500)
Gross margin ........... $ 7,500
Operating expenses ........ (4,000)
Operating income .......... $ 3,500
Upon reviewing these numbers, the CEO turned to the CFO and stated, “I think the market will
be forgiving if we come in 5 percent light on the top line ( sales), but if we miss operating income
by 12.5 percent ($ 500 ÷ $ 4,000) our stock is going to get hammered when we announce fourth
quarter and annual results.”
The CFO mulled the situation over for a couple of days and started to develop a strategy to
increase reported income by increasing production above planned levels. She believed this
strategy could successfully move $ 500 million from Cost of Goods Sold to Finished Goods
Inventory. If so, the firm could meet its early profit projections.
a. How does increasing production, relative to the planned level of production, decrease Cost of
Goods Sold?
b. What other accounts are likely to be affected by a strategy of increasing production to
increase income?
c. Is the CFO’s plan ethical? Explain.
d. If you were a stockholder of MultiTech and carefully examined the 2013 financial statements,
how might you detect the results of the CFO’s strategy?

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 Prior to the start of fiscal 2013 managers of MultiTech

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