question archive Dynamic Industrial is a relatively young company, with an unsophisticated accounting system
Dynamic Industrial is a relatively young company, with an unsophisticated accounting system
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Dynamic Industrial is a relatively young company, with an unsophisticated accounting system. Dynamic Industrial manufactures two products, X370A, and Z410B. Each of the products has multiple components and materials (identified by SKU number), but assembly is relatively quick leaving no work in process inventory at the end of the period. Invoices are only approved for payment if the full quantity of the SKU has been received.
Dynamic Industrial purchasing manager has a friend who owns the company (COMP Inc) that produces some of the components that go into the X370A. COMP Inc. has been losing money in recent years. To save money, COMP Inc. has begun using a lower quality component and selling their components at a lower price to the public. However, the Dynamic Industrial's purchasing manager has not renegotiated the contract and continues to purchase the components at an above-market rate to help the friend. Is the purchasing manager's behavior in this situation ethical? Why or why not?
The beginning and ending inventory accounts for each product (units of output) for 2018 are provided below:
Beginning Inventory Count Ending Inventory Count Units Sold
X370A 5,040 4,040 18,220
Z410B 3,130 2,005 17,000
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This act is considered unethical. This situation is an example of a principal - agent problem. This problem exists when there is a discrepancy between the priorities of the agent and the principal. In an entity, the company is the principal. It delegates and assigns the management of the entities transactions and positions to certain individuals elected and assigned to lead the company. This individuals act as an agent of the company. Under ideal situations, the agent shall act in behalf of the company and is expected to put the company's priorities first in every act they execute as the company's agent.
The principal - agent problem in this problem arose when the purchasing manager have prioritized his personal motives (i.e. helping his friend by purchasing the components from COMP, Inc. at a price above the optimal price) over the company's priorities (i.e. to purchase cost at the lowest cost available). The purchasing manager should have continued the purchase under the most advantageous and competitive that the company benefits from the transactions.
As agents who are vested with authority based on trust and confidence of the principal, the agent shall act with integrity and honesty in ensuring that they bring the company-principal to the most advantageous activities all the time.
