A10-56 Ethics and outsourcing
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A10-56 Ethics and outsourcing
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A10-56 Ethics and outsourcing. Der Dutchman is a large family- style restaurant chain located throughout the Midwest in Amish communities. Currently Der Dutchman makes its own biscuits. Customers love these biscuits; they are light, fluffy, and incredibly delicious.
People are not eating out at restaurants as much as they did before the recession hit in 2007. Like many other restaurants, Der Dutchman is under increasing pressure to control its costs to help to counteract the lower number of diners. As part of its efforts to remain cost competitive, Der Dutchman is analyzing whether it should continue to make its own biscuits or to outsource part of the biscuit- making process by purchasing ready- made dough from a national supplier.
Seth McGilvrey works as a management accountant at the Der Dutchman restaurant group. Seth is asked by the controller to analyze whether the biscuits should continue to be made in- house from scratch or if the company should purchase ready- made dough from a national supplier. Seth’s mother- in- law, Audrey Parsons, is a salesperson for a national food manufacturer. He decides to get a bid from her before contacting any other suppliers. Audrey has been struggling financially since the illness and subsequent death of Seth’s father- in- law last year and could use the sales commissions generated by this order. Seth emails Audrey and asks her for a bid price for the ready- made dough. Audrey sends him a price of $ 33.20 per case (a case of dough makes 12 dozen biscuits.)
A10-56 Ethics and outsourcing
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Seth analyzes the cost of making the biscuits in- house. He arrives at the following schedule of cost for the dough to make 12 dozen biscuits:
Seth’s analysis shows that the restaurant should purchase the ready- made dough from the national supplier because the ready- made dough is less expensive than making the dough in-house. However, Seth has deliberately left out all of the fixed costs in the cost calculation of making the biscuits in- house. Part of those fixed costs is unavoidable, but he does not distinguish between avoidable and unavoidable fixed costs in his analysis. The unavoidable portion of the fixed cost allocated to 12 dozen biscuits is $ 1.24.
Seth submits his analysis to the controller. In his report, he recommends that Der Dutchman products choose Audrey’s firm to supply the dough for its biscuits. Seth chooses to say nothing about his relationship to Audrey, figuring no one will know since his mother- in- law has a different last name than he does.
The controller accepts Seth’s analysis and Der Dutchman enters into a contract with Audrey’s firm for the ready- made dough.
Requirements
1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
a. What is ( are) the ethical issue(s) in this situation?
b. What are Seth’s responsibilities as a management accountant?
2. When making the decision to outsource the dough, what other factors should be considered?
A10-56 Ethics and outsourcing
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