Susan is a managerial accountant for Bay City tires, Inc. Bay City manufactures tires for passenger automobiles at a plant on the outskirts of town. They also produce tires for commercial equipment at a dockside facility on Lake Michigan. Due to the recent downturn in the economy, Bay city has lost sales and been forced to reduce prices.
One of Susan's responsibilities is to prepare and present the company's financial plan for the upcoming year to the senior executives and the board of directors. In this capacity, Susan asks the two plant managers to prepare a budget. While reviewing these budgets for the presentation, Susan notices that the budget for the Dockside facility includes a Profit Graph that projects an increase in profits and a lower break-even point. Curious as to how this would be possible given sales and product prices have declined, Susan, asks Jack, the Dockside manager to explain. Jack explains that a planned increase in worker productivity would reduce per unit variable costs, thereby increasing their contribution margin.
Problem 1: Is the plant manager's assessment of the effects of increased production on the contribution margin correct? Why, or why not?
Problem 2: Are the manager's actions ethical? Are they legal? Explain your answer and use at least one credible source to support your justification.
Problem 3: Should Susan present the manager's proposal to the Board of Directors? Why or why not?