Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 which has the effect of increasing operating income. Note that since
there was no opening stock, the fixed cost in stock can also be calculated as €1,950,000 –
€1,404,000 (included in cost of goods sold) = €546,000. If the operating income is adjusted by this amount, 2005 profits would be €646,000 – €546,000 = €100,000 and Pirelli’s bonus would be 15% of 100,000 = €15,000, not €96,900.
3 Pirelli’s behaviour is not ethical. Professional managers are expected to take actions that are in the best interests of their shareholders. Pirelli’s action benefited himself at the cost of shareholders. Pirelli’s actions are equivalent
to cooking the books, even though he achieved this by producing more stock than was needed, rather than through fictitious accounting. Some students might argue that Pirelli’s behaviour was not unethical – he simply took advantage of the faulty contract the board of directors had given him when he was hired.
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