ACCOUNTING FOR MANAGERIAL DECISIONS

9-1 ETHICS CASE: JUNIPER PACKAGING SOLUTIONS, INC. [LO 1 AND ETHICS]

Juniper Packaging Solutions, Inc., provides custom packaging products to companies all over the United States. With five production facilities, the company produces cardboard boxes, plastic and steel drums, aluminum bottles, and absorbent pouches and bags. Companies using their products ship everything from chemicals in 55-gallon containers to biological specimens in tamper-evident pouches.

Spencer Williams is the vice president in charge of the Maryland production facility, and in the last year he's become concerned about plant performance. The plant needs a long lead time for orders, and defect rates have increased-both of which hurt customer satisfaction. In Spencer's opinion, the problems are the result of outmoded production equipment. Recently Spencer's team of production managers identified three pieces of state-of-the-art equipment that they believe will turn the plant around and make it the most efficient of the company's five plants. Unfortunately, the price tag of the equipment is $2,000,000 and the company has a freeze on capital expenditures greater than $500,000. The freeze was mandated by the company chief executive officer (CEO) after third-quarter earnings dropped by 10 percent due to a weakening of the Asian economy and reduced shipments to Japan and Korea by several of Juniper's major customers.

Spencer and the controller of the Maryland plant both believe that the new equipment is absolutely necessary for the company to maintain customer satisfaction and market share. Together they've devised a plan to circumvent the capital expenditure freeze. Each piece of equipment is actually a "system" with multiple components (e.g., conveyor belt, box molding unit, box taping unit, etc.). Spencer will ask the equipment manufacturers to break each system into components and submit multiple bills (e.g., a separate bill for the conveyor, a separate bill for the box molding unit, etc.) each less than $500,000. The plant controller will then approve the expenditures as being consistent with the guidelines that only prohibit expenditures on equipment costing more than $500,000.

Required:-

Is the plan devised by Spencer and the CFO ethical? In answering this question, assume that Spencer and the controller are both firmly convinced that the new equipment will increase shareholder value.