(ii) Impact of response 1
Change in operating profit due to response 1
Increased cost of sales 10% x 2m units at $21 = 4·2 $m
Audit costs 0·5 $m
Marketing campaign 0·8 $m
Loss of operating profit 5·5 $m
New contribution per unit = 51·9 $m
Number of units to cover lost operating profit = 105,973 $m
Quantitative impact:
The main stakeholders affected financially are the shareholders. The increased compliance costs, both variable and fixed, lead to a loss of operating profit of $5·5m and would need to be covered by additional sales of 106,000 pairs of shoes. If MS can be seen to respond rapidly and decisively to the problems, it will gain a reputational advantage which may generate those extra sales.
Qualitative impact:
There are three stakeholder groups (customers, regulator and employees) who will be affected by the scandal and MS’ response. All three will be disappointed that the company may be involved with an unethical practice.
The company must first establish if this is in fact the case. If it is, then the damage may occur through fines imposed by the regulator and lost sales due to the impact on MS’ reputation. For the employees, the damage may be a loss of motivation and trust as the organisation would have broken its own code of ethics. For all three groups, the key solution is a rapid and public addressing of the problem and both responses 1 and 2 appear to do this.
A key tactic in dealing with such issues is to be first into the public domain by owning up to any breaches of the MS code alongside the announcement of solutions.
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