Kamna, Milton's president, is very concerned about Milton's profitability. She asks Amit, production manager, and Sudhir, controller, to see if there are ways to reduce costs.
After two weeks Amit returns with a proposal to reduce variable costs to 52 per cent of revenues by reducing the costs Milton currently incurs for safe disposal of wasted plastic. Sudhir is concerned that this would expose the company to potential environmental liabilities. He tells Amit, "we would need to estimate some of these potential environmental costs and include them in our analysis." "You can't do that," Amit replies. "We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing."
After two weeks Amit returns with a proposal to reduce variable costs to 52 per cent of revenues by reducing the costs Milton currently incurs for safe disposal of wasted plastic. Sudhir is concerned that this would expose the company to potential environmental liabilities. He tells Amit, "we would need to estimate some of these potential environmental costs and include them in our analysis." "You can't do that," Amit replies. "We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing."
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- Given Amit's comments, what should Sudhir do?
- If Sudhir indicates to Kamna that estimates of environmental costs and liabilities should be included in the analysis; and if she still insists on modifying the numbers and reporting lower environmental costs, what should he do? Should Sudhir now raise the matter with Kamna's superiors?
- If in taking all these steps, there is continued pressure to understate environmental costs, what should Sudhir do? Should Sudhir consider resigning from the company because he would not like to engage in unethical behavior?
- What if Sudhir comes across the same situation at his new organization? Should he consider resigning again? How often would it be okay for Sudhir to resign on ethical grounds, if he finds the same situation at every company he joins?
- Should Sudhir heed Amit's advice, show some adaptability and accept the proposal because after all, as suggested, Milton's competitors (and all other companies in the industry) are doing exactly the same thing?
- If Sudhir resigns from Milton on ethical grounds, would he be over reacting?
- If Sudhir resigns on ethical grounds, could it be that he has a skewed concept of morality?
- Should Sudhir change his thinking to reflect the notion that since there is no one unfailing standard of good and bad, right and wrong, ethical and unethical, he must accept the industry's proposal (which is the same as Amit's), even though he finds the entire episode unethical?
- What's your take on this subject?
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(adapted from a Charles T. Hongren, Srikant M. Datar, George Foster, Madhav V. Rajan, and Christopher Ittner book)
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The authors suggest the following course of action:-
"Sudhir should indicate to Kamna that estimates of environmental costs and liabilities should be included in the analysis. If Kamna still insists on modifying the numbers and reporting lower environmental costs, Sudhir should raise the matter with one of Kamna's superiors. If after taking all these steps, there is continued pressure to understate environmental costs, Sudhir should consider resigning from the company and not engage in unethical behavior.

