Question

You are the Cookie division controller for Auntie M's Baked Goods Company. Auntie M recently introduced a new chocolate chip cookie brand called Full of Chips, which has more than twice as many chips as any other brand on the market. The brand has quickly become a huge market success, largely because of the number of chips in each cookie. As a result of the brand's success, the product manager who launched the Full of Chips brand has been promoted to division vice president. A new product manager, Brandon, has been brought in to replace the promoted manager.

At Auntie M's, product managers are evaluated on both the sales and profit margin of the products they manage. During his first week on the job, Brandon notices that the Full of Chips cookie uses a lot of chips, which increases the cost of the cookie. To improve the product's profitability, Brandon plans to reduce the amount of chips per cookie by 10%. He believes that a 10% reduction in chips will not adversely affect sales, but will reduce cost and, hence, help him improve the profit margin. Brandon is focused on profit margins, because he knows that if he is able to increase the profitability of the Full of Chips brand, he will be in line for a big promotion.

To confirm this plan, Brandon has enlisted you to help evaluate it. After reviewing the cost of production reports segmented by cookie brand, you notice that there has been a continual drop in the materials costs for the Full of Chips brand since its launch. On further investigation, you discover that chip costs have declined because the previous product manager continually reduced the number of chips in each cookie. Both you and Brandon report to the division vice president, who was the original product manager for the Full of Chips brand who was responsible for reducing the chip count in prior periods.

1. Is this an ethical strategy for Brandon to pursue? What are the potential implications of this strategy?

2. What options might you, as the controller, consider taking in response to Brandon's plan?

Answer 1

It is certainly unethical on Brandon's part to pursue strategy that involves reduction in the inputs so as to reduce costs in order to gain a promotion. The demand for the product is due to the fact that it has more chips and the company has created a niche for itself in the market. If the decision taken by Brandon is implemented, the quantity of chips will reduce in the cookies and may give a setback to the company in terms of demand and sale in the long run since the consumers will realize the taste difference anyway. This in turn will reduce the profits for the business and when an investigation in to the reason for reduced sales is taken up, this decision by Brandon will surface. Also, the earlier product manager was able to get a promotion because of introduction of more chips in the product and not otherwise. As a controller, you must look at other options of reducing costs such as factory overhead or improvement in the production methods to reduce the overall cost of manufacturing which will in turn reduce the cost per unit manufactured. The controller must not accept Brandon's plan as it may result in dampened sales, lost good will in the market and harm the company's potential prospects.