Background of the Case

The global economy brings about significant changes for business industries all around
the world, yet there have always been a number of issues that affect not just the owner but
also every individual working for the company. By understanding their aim and dedication when
such dilemmas occurred, they can oversee what measures should be enforced as a result of the
alterations that have taken place. Supplier of corrugated boxes, Bexley Box Company, Inc.
concerns over overcapacity in the manufacturing of automobile parts have prompted John
Easton, the CEO, to look into further options that will make use of the company's underutilized
capacity. Whereas, it has successfully presented a supplier proposal to SmileNow Distributors, a
major online retailer with a disproportionately large market share in the US. John Easton saw a
chance to boost motivation among managers by offering an added bonus through the
acquisition of SmileNow. He proposed a challenging target: a 10% increase in the already
budgeted operating income of $10 million would result in an extra 10% bonus for the
managers. Initially, March was hesitant, but Easton convinced him that incentivizing the staff
and boosting morale was worth it.

The month of December came to a close, and it was time for Harry March and his team
to evaluate the monthly fluctuations in fixed overhead costs. Despite streamlining the monthly
calculation of overhead variances, late invoices made it challenging to accurately estimate total
overhead expenses and connect them to the fixed overhead components such as depreciation
or estimated monthly utility costs. In which Harry March's gaze was captured by the shifts in
both production volume and fixed overhead spending. Eager to find out what transpired during
his absence at the conference, he delved into the data and observed a significant increase in
SmileNow's weekly production from its usual 7.5 million boxes to a remarkable 10 million. This
resulted in an extra million boxes produced for the month, and just a few weeks before the
year's end. The primary ethical dilemma that must be resolved by the company is whether to
continue manufacturing the vast number of boxes even if doing so would have a significant
negative impact on their cash flow and manufacturing schedule in consideration of their
contract with SmileNow Distribution. Hence, the ethical dilemmas that the Bexley Box Company
is facing should be evaluated in light of the metrics being suggested as to how such
performance will meet the total end result while maintaining the cost, quality, service, and
speed of the complete production.

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Statement of the Problem

The following are the problems that needs to be addressed in relation to the case
presented:

1. Should Bexley Box Company Inc. continue to move forward in producing more volumes
of boxes at an incremental rate considering the discrepancy compared to its fixed and
production volume variances and the looming increase of incentivization for managers or
retract its current production with the risk of not delivering its agreement with SmileNow
Distributors?
2. Given the incremental and sudden increase in the production of boxes close to the year-
end reporting and audit, why should Harry be worried about this sudden change?
3. Given the current production levels of the company, how can the company “fairly
compensate” its employees that is desirable and achievable?
4. Given that Harry is part of the Institute of Management Accountants, what steps could
he do next in consideration of the IMA Statement of Ethical Professional Practice?

Assumptions

The following are assumptions to be used in the case:

1. Assume that the state tax subsidy was realized in December. This is assumed to
compute for the fixed overhead spending and production variance using a three-way
variance analysis
2. Assume that labor efficiencies are not affected due to automated consistencies. This is
assumed to compute for the change in the direct labor rate variance brought about by
the additional hired college student workers for the company
3. Assume also to disregard the effects of hyperinflation in the economy and the
fluctuation in currencies, particularly for US Dollars.
4. Assume ceteris paribus (all other things being equal) so that no economic factors can be
changed in the situation given

Analysis

The company faced a plethora of problems in the areas of manufacturing, production,

human resources and ethics brought about by sudden, rash and unilateral decisions. The main
issue at hand that has exacerbated the current position of the company is the sudden increase
in the number of production at year-end. Although it was intended to meet the demands of the

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distributor per the contractual agreement, and to satisfy the requirements for a company
incentive among managers of the company, these reasons are not satisfiable enough to come
up with a decision mentioned above. The decision also was solely based on the decision by
some managers in the company, and it was not communicated through proper channels and
the proper authority to assess if the company can really produce with an incremental increase
in its production in consideration with the existing situation of the company. It was unilaterally
agreed upon by Stan and John without consulting Harry, a seasoned professional in the field of
accountancy, and considering factors in deciding whether to increase production levels at such
a time.

In determining and considering increasing production levels in an economic sense, the

factors of production (land, labor, capital and entrepreneurship) which were proposed by
several economists such as Adam Smith, Karl Marx and David Ricardo should be looked into.
These factors must be analyzed in relation to production levels and the distinguishing output of
the company. The theory of production assumes that a production process is segmented into
two phases: the “short-run” in which the company can change the level of input (labor), and
the “long-run” period in which the company can systematically and flexibly adjust various inputs
of products to arrive at the optimal mix of the product in the long-run. By looking at the stage
of production from levels 1-3, although the company has hired more workers to satisfy the
production levels and output from the distributors, the 500 increase in workers will not satisfy
the increase in 2.5 million boxes of output due to the lack of capacity in certain factors of
production, especially in labor (if the company decides to produce more boxes against the initial
increase of 2.5 million) and in land and capital (as it intends to produce more, a production
capacity in technology and in facilities must be assessed). As such, if the company produces
additional production in boxes, its costs of production will undoubtedly go high which in turn
will lead to a lower profits gained at the selling price per box. With this scenario, Bexley Box
company will only supply a smaller quantity at the levels of price it intends to.

In concurrence with the dilemma surrounding the company, the financial impact of the
decisions could also be understood and analyzed by using a variance model approach that will
determine if the conditions surrounding the increased manufacturing and production of boxes
are favorable and unfavorable. By using the three-way variance model (spending, efficiency and
volume), it can be ascertained that the variances would be unfavorable to the company in
consideration with the additional workers and the additional levels of production. It would yield
an unfavorable amount of $200,000 on spending, efficiency and volume).

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 With regards to management practices, the incentivization and the communication
process should be analyzed. In incentivization, a theory proposed by Frederick Herzberg (1950)
called the two-factor incentive theory, proposes that an employee will feel satisfied with his
current employment based on motivators (desire for recognition, achievement) and hygiene
(policies, working environment and salary). Although a bonus and incentive based on
production levels is understandable, a much more rigid incentive that is based on employee
performance should be utilized, and not on the company outputs. The company can introduce
incentives such as performance based incentives, improvement in working conditions and a
strengthened cultural working environment to foster growth and loyalty inside the company.

With regards to communication, the Shannon-Weaver Model (sender-encoder-channel-

decoder and receiver), could be utilized to analyze the situation. Although Harry ascertained the
undesirable consequences, he did not communicate the message well through the proper
channel due to the decoder’s preconceived beliefs (which can serve as noise or barrier in
communication) in the situation as he believes that producing more output can benefit the
employees as well as the company in the long run while compromising the manufacturing. If
the decoder has a certain belief which contradicts the sender’s message, this will ultimately lead
to miscommunication.

Using SWOT Analysis, it can be ascertained that the company has maintained a low
working environment that focused on incentives. Although the company has a strong position in
the market with its partnership with a large internal retail distributor, the company cannot meet
its objectives due to lack of preparation, lack of consideration of extenuating factors which is
also highlighted using PESTEL Analysis and its rash decision of over capacitated and over
expanding production to just meet its target output without considering its current production
and financial performance.

Recommendations

Given the analysis of the foregoing situation, and in accordance with the fundamental
objective of running a business (which is to generate financial growth), the company should
stop operating the increased volume of production outputs in accordance with a cost-benefit
driven analysis that the cost of incrementally producing more while compromising its operations
due to multiple constraints will be more than retracting the added production outputs and not
meet the target levels of the company. Since it was uncertain whether the company could meet
its goal by reducing capacity, it is preferable for the company to cease production to also avoid

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sequential problems that could escalate to more serious production volume variance-related
issues. The company is already facing a developing challenge related to excessive surplus
capacity. If the company wishes to still work with SmileNow Distributors, it can rework its
existing contract to favorably agree on a target that is attainable and achievable in the long
run. As a conclusion, the company should also work its existing frameworks and company policy
on incentives, and ensure that internal controls on variances are met without compromising the
operations of the business.

Notes:

SWOT ANALYSIS

STRENGTH:
● The company serviced numerous
producers that supplied the largest
automobile companies in the state.
● The management was convinced that
SmileNow provided an opportunity for
growth. It will not only realize
additional profitability but also
accumulate resources over time.
WEAKNESS:
● Has lackluster productivity because of
decreasing sales orders from the
company’s traditional customer base
.
● Reporting became a lengthy and
distinct priority for the Bexley Box
accounting staff
● The goals for the bonuses were not
achieved because the incentives itself
were the main focus.

OPPORTUNITIES:
● Become a regional supplier of
shipping boxes to a large internet US-
based retailer.
● Potentially add volume in the form of
other sizes of the boxes.
THREATS:
● The company faced a mounting
overcapacity. In which there were a
number of boxes needed to be sold, if
not met it will result in a possible
problem that falls on variance as well
as on the factory overhead.

● Window of opportunity will close if

unfavorable direct manufacturing
variance were experienced.

● Incremental but immaterial variances

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 to continue engaging periodically.

PESTEL ANALYSIS

Political ● government and state policy

● trade policy
● tax policy
● existing labor policy

Economic ● economic growth

● inflation rates
● exchange rates

Social ● workplace culture

● cultural barriers

Technological ● level of technological innovation

● automation
● technological change
● research and development activities

Environmental ● climate change

● environmental policies
● pressure from environmental activists
● weather
● climate
● deforestation

Legal ● labor laws

● employment laws
● health and safety laws

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