ACCT 3121 CH4_001

# ACCT 3121 CH4_001 - Solving Organization Design Problems Using Accounting Problem Set 4 Andrew A Christie E J Ourso College of Business

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Unformatted text preview: Solving Organization Design Problems Using Accounting Problem Set 4 Andrew A. Christie E. J. Ourso College of Business Administration Louisiana State University Baton Rouge, LA, 70803-6304 October 13, 2009 © Copyright: 1990 to 2009 Instructions Cooperation: 1 encourage you to discuss questions and answers with your peers. Former exam questions: To provide perspective on the standards expected, homework sets include some former exam questions. These have FEQ in parenthesis after them. Problem Set 4 1 Orlov Industries (FEQ) Orlov Industries makes aluminum masts for sailboats, and can operate only at the four volumes shown in the following table. The factory manager chooses production volume, and is evaluated based on average unit cost. Volume 20,000 \$21,000 , 22,000 23,000 Revenue 236,300 247,820 258,490 268,710 Variable costs 168,000 178,770 189,700 200,820 Fixed costs 60,000 60,000 , 60,000 60,000 190,1 * , v m <15» 11w 1 At which volume should Orlov o What volume will the roduction manaer choose to o erate at? (my), OOL/m; {m 71.0" (1’3; 411/, (3:13” What does the roduction manaer's decision cost Orlov each period? 1/3 ' A w Is the cost in the prior question a knowledge transfer cost (KTC) or a control cost CC ? covet/(M Under what circumstances is it optimal to let the factory manager choose production A ‘ volume? Wham M, haw “{1le ,I/u,>1.,:,41 at (2», o la“ 6. Provide at least one change in the organization design that would solve this problem. What 1. ,2. 3. 4. 5 , lie-w ;z?"“7::€2:?7(‘932%““Frgl'wtgw 7‘9“ ’ , . f‘ rm; 71:3) ~v‘ 1- . 1 , I\‘ "1 ~- ,1, f ,1 , ‘ a} L.,\ 1L Dfxt I: M, (413013,) k .,_..I V ; ., . ﬂ _ m r 'A 4% {3:52.13 ‘ 5%: " r3» " l 1 “90 >l< Ange/ll TO LO. KEV-Pl},HYDE» ; Ohmic)“. ’§)_4,¥’1,{\‘{111J;\s,CUA Us ,QN cell/l wt“ low» \J 8111/ ‘Mm t. Problem Set 4 2 2 California Electric Power Deregulation and Pricing. In 1996, California deregulated its electric utility industry. The deregulation had the following characteristics. The ﬁrst two affect costs and supply, while the third affects demand. Jointly, the three characteristics generate a situation where demand for electricity exceeds supply. 1. The utility companies were required to sell their generating plants. That is, the utility companies were forced to outsource power generation. 2. The utilities were required to purchase electricity on short term, not long term, contracts. 3. A cap (upper bound) was placed on the retail price of electricity. Background i It is useful to distinguish short run from long run prices. Long run prices are negotiated and are typically subject to formal contracts. Short run prices are called spot prices. They are the price today for a given quantity today, and can differ substantially from prices under long run contracts. Price risks are higher for both buyer and seller with short term contracts than with long term contracts. No new generating plants have been built in California since the mid 19805, partly because of opposition from environmental groups. Another factor affecting supply was uncertainty about the form of the forthcoming deregulation. Utilities were unwilling to build power plants that they might end up operating at a loss. Uncertainty about future prices also discouraged investment in the distribution grid (transmission lines). Observers characterize the California electrical grid as shaky. The requirement that the utilities purchase power on short term contracts was caused by the State Legislature's fear that the wholesale price of power would fall. If the utilities were committed to long term supply contracts at prices higher than the current spot price, Californian consumers would pay "too much" for power. From the mid 19805 to late 2000 demand increased substantially, partly because of the growth of the high technology industries, but there was no corresponding increase in supply. The increase in demand, combined with the restriction on supply, and the restrictions imposed by deregulation, resulted in a massive increase in short term wholesale electricity prices. The wholesale prices increased roughly ten fold, but the utilities could not pass the price increase along to retail customers. The utilities were required to sell power at a price that was much lower than the wholesale purchase price. As a result the utilities lost about \$12B over a one year period. Consumers were subjected to "rolling black outs," which are deliberate interruptions of electrical service. In early 2001, the states largest utility, PG&E, was unable to pay its existing debts, and could not obtain credit from either financial institutions or suppliers. Wholesale electricity suppliers, most Problem Set 4 3 of whom were outside California, believed they would not be paid for electricity supplied to the California utilities. Early in 2001 PG&E ﬁled for voluntary bankruptcy protection. Southern California Edison, the state's second largest utility, announced it was considering a similar step. The state then took over the purchase of power, and the utilities essentially became mere distribution networks. While the state subsequently increased the retail price of power by about 50%, the state is still selling power at a loss. A simple characterization of the California power crisis is that the State Legislature has set up a system where retail prices are low and the excess of cost over price is ﬁnanced out of tax revenues. Required 1. Who caused the increased uncertainty (variation in) utility prices faced by consumers and utilities? 1W {4; U Mun, ‘ 2. Consider potential opportunity costs of the State Legislature's decisions about ‘2 V y'- “ﬁ 1/“):1! ﬂ], / 01.1 V deregulation? What are these? Why did the Legislature not take these into account? " " . . I n “1 ‘ .. 3. ®Are there implicit subsidies in the current [email protected] so, who is subsidies increase or decrease the probability that the gap between demand and supply “01101056? i3 Eli/[Ob‘q CW fat/.mer NW Flax. @W/W‘Wé ll V‘dl‘f . - ) . a 4. Compare the current system to one where the retail price is not regulated, and is allowed to change to a level that equates supply and demand? Which system is more likely to close the gap between demand and supply? Md? i9 u 1-» H V, 5. For ﬁscal year 2000, PG&E and SC Edison paid bonuses totaling about \$50M to managers. There were outraged comments from Legislators and the press (The O'Reilly Factor). Under what circumstances, if any, is it optimal to pay these bonuses? " ~ r m 6. Would the utilities have voluntarily outsourced power generation. cause of the California problems? If not, what is the cause? 7. Why was the California Legislature concerned about wholesale price declines, but not wholesale price increases? That is, why did the state require the utilities to contract in the spot market? 8. Does the debacle in California imply that deregulation is a bad idea? N, / “Dim/m WW9 W) -2 » . l IVY?) I 4/: a v a, W "ijylfijxl “Iiiri‘ptil/ 0" Problem Set 4 3 Organization Design and Choice of Capacity Consider two competing ﬁrms selling the same mix of products. One (C Corp.) is centralized, so the CEO chooses the long run capacity. The other (D Corp.) is decentralized along product lines at one level below the CEO, and the choice of long run capacity is delegated to the divisional VPs. are that C Corp. is more likely, or less likely to optimize, or you cannot tell. Justify your answer. y WLV\\,,{/~4/ {iii/106 Y (J =. V i » , mm 00,) la / {mm 19. ,y' W Mr C 0.0.] with he Unit Cost Under Method 2 TC 4 Sullivan Inc. (FEQ) Sullivan Inc. has a choice of two cost allocation methods, following characteristics. Unit Cost Under Method 1 100,000 150,000 |_ 200,000 As controller of Sullivan, which allocation method would you’lchoose? Provide at least one justiﬁcation for your choice. //.\ Wilma W‘Awt‘ ecu-{M w.:z_;{;«’/\.zrai CALM/C w.» MUM/r Q J " Normal), (’LOK).,9;:‘/\€/3 TiAM‘V'kx/“zin/ . ,, k' 3.: ole Lil/y ...
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## This note was uploaded on 12/14/2010 for the course ACCT 3121 taught by Professor Chenier during the Fall '08 term at LSU.

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ACCT 3121 CH4_001 - Solving Organization Design Problems Using Accounting Problem Set 4 Andrew A Christie E J Ourso College of Business

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