Business Conclusion
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materials.docxAssuming that Mrs. Farzam has filed a suit against Rock Cookware, Inc. for the injuries that she sustained under the theory of strict product liability and also assuming further that Mrs. Farzam would prevail in a cause of action against Rock Cookware, Inc. under strict product liability, it can be ascertained that she is likely to recover punitive damages.
The aspect of whether she should be paid lies in proving that Rock Cookware were liable for the accident that took place. The analysis of the case study shows how Rock Cookware were in a desperate need to make more sales. This led to them coming up with a product which entailed less production costs hence even after cutting some of the selling price, the company would still make a profit. However, the product came with defects which could lead to it exploding after being placed in a cold surface, a fact that they knew when the production of the first phase of products was almost to be complete. The most ethical thing to do would have to halt production and repair all the products accordingly. By doing this, the company would have exempted itself from any accident that would have occurred due to selling the products knowing very well that they encompassed a dangerous strait.
From further analysis of the case, it can be seen that Rock Cookware, Inc. were quite aware of the dangerous aspect of the product that they were selling to customers. This is proved by the fact that shortly after Mrs. Farzam’s accident, other serious explosions take place leading to the quality engineer from Rock Cookware hiring an attorney and a newspaper reporter after which he discloses that the original test results of the ovenware product had been altered. This places the liability on Cookware since the altering of the results shows that they knew the adverse effects of using the product yet they didn’t inform the prospective customers. From this analysis, Mrs. Farzam is likely to be paid punitive damages.
Financial Analysis
The following facts are needed to do a financial analysis to explain why management chose the second option. Due to an economic downturn, Rock Cookware’s sales did not meet expectations for the past two years and the product manager was unable to reach his required target of producing 25 percent return on sales. In an attempt to increase sales for the year 2007, engineers redesigned the Ever Last Ovenware product. The redesigned product would be able to save 35 percent of variable production costs, allowing the price of the product to reduce by 10 percent. By selling 1,500,000 units per quarter the required 25 percent return on sales at the end of the year would be achieved. A defect in the product forced management to make a decision based on two options. The first option was to delay shipment, produce the product using the old costly method for six months while selling it at the 10 percent reduced price, risk losing one-third of the orders, and even risk losing customers permanently. The second option was to sell the defective product without disclosing the hazards and hope no problems would occur during the six months the defective product was being fixed by engineers. We were able to do a profitability analysis using the information above and in the 2007 income statement to measure the operating success of Rock Cookware’s initial plan, first option, and second option. If the initial plan to redesign the ovenware went as planned, the product line would have made high profits and achieved the target return on sales. As you will see in Exhibit A, the sales would be $81,000,000 and the return on sales would be 33.42 percent, in other words, 8.42 percent above the required target rate. Also, the lowered 35 percent variable production cost would greatly benefit Rock Cookware by increasing their gross profit to $35,321,231. Once the defect was found during routine quality testing, management discussed their two options and each option’s implications. The first option would cause a 6-month delay in shipment and as a result, there would be loss of 2,000,000 units sold due to upset customers cancelling their orders. As you will see in Exhibit B, the loss of orders would result in a return on sales of 1.67 percent, in other words, 23.33 percent below the target rate. The loss of orders would also result in a loss of $27,000,000 in sales. Management chose to proceed with the second option, selling the defective product with 0.25 percent failure rate. As you will see in Exhibit C, the return on sales is 30.82 percent, in other words, 5.82 percent above the required target rate. Based on the two options, the second option had the highest return on sales. Rock Cookware was not able to sustain growth in the short and long-term, meaning it is not profitable. By choosing the second option there were many short-term benefits involved from making the ovenware line less expensive to produce. Rock Cookware was able to save 35 percent of variable production cost for the entire year. It had a record number of 6,000,000 units sold and gross profit was the highest since 2004. Return on sales was the highest the company has achieved in the past five years according to previous income statements. However, in the long-term, their short-term success does not matter when they are faced with many costly lawsuits and settlements.
Ethical Analysis
In this case, the relevant issue is whether or not Rock Cookware, Inc. should ship the defective ovenware goods to consumers without calling attention.The primary stakeholder is Rock Cookware, Inc. because they would suffer substantial financial losses as well as lose customers to competitors. The consumers are also primary stakeholders because of the possible risk of being severely injured. Thus, there are two possible solutions, either Rock Cookware, Inc. delays and corrects the defective goods, or they can proceed to fulfill the shipment without having corrected the defective goods.
If Rock Cookware, Inc. delays and corrects the defective goods, then this solution can be supported by the Utilitarian Theory because delaying and correcting the defective goods will provide safety for all consumers. This solution can also be supported by the Justice Theory because the fair distribution will provide each consumer with the same benefit of obtaining a non-defective product.
Alternatively, if Rock Cookware, Inc. proceeds to fulfill their shipment and sends out defective products, then this solution can be supported by the Utilitarian Theory because it provides the greatest good to the company and its sales. This solution can also be supported by the Justice Theory because the company can justify the harm and damages of the defective products to the consumers to be at a minimal. Thus, delaying the shipment is the most ethical solution for Rock Cookware, Inc. because it prevents any harm to consumers and avoids the possibilities of potential lawsuits.
Legal Analysis
According to our research, Rock Cookware Inc. could face legal implications for the actions that were taken by the managerial staff. If this situation were to go to trial, Rock Cookware Inc. would most likely be sued by a case of strict product liability.
Using DSI Inc. v. Robins, the theory of strict products liability states that any person who sells products could be held strictly liable as long as the product was defective and there was causation.
Strict Liability
Liability for the product is taken on by the merchant, Rock Cookware Inc., when the product is sold in the defective condition and is “unreasonably dangerous to the user or consumer” (DSI Inc. v. Robins).
A product can have one of three separate defects: manufacturing, marketing, or design defect. The product has a manufacturing defect when the finished product is different, in quality or build, from what it is supposed to be and that difference causes the product to be unreasonably dangerous. A marketing defect is when the product lacks a warning or instruction that causes the product to be unreasonably dangerous. The warning or instruction is not necessary when the risks taken with the product are “within the ordinary knowledge common to the community” (DSI Inc. v. Robins), or common sense. A defective design follows that the product is designed to specifications but it is the design itself that causes the product to be unreasonably dangerous.
When a design defect is in question, the case is observed using risk-utility analysis. Risk-utility analysis is based on three factors: the usefulness of the product to society against its likeliness of injury, the ability of the manufacturer to remove the defect without incurring high costs or ceasing the products usefulness, and whether the user neglected common knowledge or warning labels thus causing danger.
Causation is when the product’s dangerous condition caused injury or damage to the plaintiff and that the defect’s role in the injury was substantial.
Rock Cookware Inc. Case
If an individual chooses to file a case of strict liability against Rock Cookware Inc., Rock Cookware Inc. would be the defendant and the individual would become the plaintiff. What follows are applications of the strict liability rules from both perspectives of the case. According to the rules above, strict product liability must have one of the three stated defects AND causation.
The plaintiff could argue there was a manufacturing defect because the product manager stated that the new modified ovenware (product) had exactly the same safety features and functionality as the original product. The original product’s functionality was that the ovenware could go from oven to refrigerator without breaking. When the new ovenware was manufactured, it lacked the safety feature and functionality that was previously advertised because the product had a possibility of exploding when taken from extremely high temperatures of 450-500 F to cold temperatures.
The plaintiff could also argue there was a marketing defect. This is because there was no warning label on the item stating that the item could explode at 450-500 F if placed immediately onto a cold surface. The plaintiff would state that the product’s defect was not common knowledge because the product defect was contrary to the functionality of the product.
The plaintiff could argue that there was a design defect because it was only after the design of the original ovenware was modified to modified ovenware that the new unreasonable danger was added to the ovenware. When using the risk-utility analysis, the plaintiff would state that the product’s usefulness did not outweigh the serious injuries incurred. The plaintiff would state that the company could have fixed the defect and still made a 5.38% return on sales. Lastly, the plaintiff could state that they also had no knowledge of the defect and there were no warnings or instructions so they could not avoid the unreasonable danger.
