Managerial Economics week 6 writing 1.rtf - UNIT ONE Topics...

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UNIT ONE Topics Introduction Rational Actor Paradigm Incentives Lead to Actions Voluntary Actions Create Wealth Opportunity Costs Fixed Cost and Variable Cost Unit Activities Review the course module. Explore the online Library and Academic Help pages. Read assigned materials. View lectures. Complete unit quiz. Respond to discussion questions. Submit writing assignment(s). Reading Assignments Chapter 1, “Introduction: What This Book is About” Chapter 2, “The One Lesson of Business” Chapter 3, “Benefits, Costs, and Decisions” Discussion Questions: Post your initial responses to the discussion forum by Wednesday 11:59 p.m. and respond to the discussion of others by Saturday 11:59 p.m. Discussion 1 (10 points) o Prompt: Goal Alignment at a Small Manufacturing Concern. The owners of a small manufacturing concern have hired a manager to run the company with the expectation that he will buy the company after five years. Compensation of the new vice president is a flat salary plus 75% of first $150,000 of profit, and then 10% of profit over $150,000. The purchase price for the company is set as 4½ times earnings (profit), computed as average annual profitability over the next five years. Does this contract align the incentives of the new vice president with the goals of the owners? After reading this discussion post, I must admit that the offer that the owners are offering sounds excellent. After doing a little adding and subtracting, however, it appears that the Vice President will not profit much out the situation. Looking closely, the owners will most definitely profit from the offer. In other words, the offer is not enough to keep the Vice President encouraged to even consider running the company. How? It states that the Vice President will earn 75% of each dollar earned up to $150,000. In my opinion, earning 75% of each dollar up to $150,000 would make me seal the deal. However, earning only 10% of each dollar after $150,000 would absolutely make me question whether I’m
making a good or bad decision. Not only would the confusion be becoming the manager, it would be a battle on whether I would be consider buying the company as well. Not to mention, every dollar that the Vice President earns will also increase the amount that he will eventually pay for the company in the end. When making a decision on a situation as such, there are so many different things that must be factored into it. Otherwise, we you could be setting yourself up for failure. Because there is absolutely no advantage for the Vice President in this situation, the he/she should make their decision with careful consideration. To do this, he/she can get the opinion of others. With the situation appearing to be nonprofitable for the Vice President, the owners expectations of the Vice President buying the company is a little slim to none.

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