JannaRowell - FIN6729 Hwk - Sec4

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Arizona State University *

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Finance

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Jan 9, 2024

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docx

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Uploaded by PresidentAardvark2617

Janna Rowell FIN 6729 Dr. David Brown November 17, 2023 1a. Incentives for fast food managers in contractual arrangements are typically standardized and apply to all chains across the company. They may be tied to behaviors (qualitative) as well as well as numerical results (quantitative). Conversely, as owners, dealers/distributors are incented by their bottom-line financial performance. The dealers/distributors are also more autonomous and may have more freedom/flexibility in operating their business. Whereas the fast-food manager is bound to adhere more rigidly to corporate procedures/directives. Equity ownership also provides an incentive for the owner to build loyalty and long-term customer relationships. In both car dealerships and beer distributorships, there is an incentive to explain the attributes of the products offered. For example, incentives are provided to salespeople to sell certain vehicles over others. With equity ownership, car dealers and beer distributors keep all the profits. On the other hand, the revenues from fast-food chains go to the corporation. 1b. Dealers/distributors who own their own companies are exposed to a greater risk than fast- food managers, so their rewards would likewise be greater. Dealers/distributors are primarily focused on profits. Fast-food managers are primarily focused on following corporate guidelines. Since car dealers and beer distributors own their property and equipment, there are costs they must cover each month. This should provide them with an incentive to run their business more efficiently than a fast-food manager who has no equity stake in his/her business. 2. Zoltek Metal Works will operate best if it vertically integrates with supplier, Nobel Homes. Zoltek produces the platform that sits under a manufactured home – built by Nobel. These projects are ongoing, i.e., Nobel is always going to build homes, and vertically integrating would increase post-relationship improvements in efficiency. Specifically, each Nobel-manufactured home requires a Zoltek platform, so the relationship is continuous and embedded. The two companies are also located in the same town, enhancing the ability to be vertically integrated and to achieve efficiencies/synergy. Vertical integration provides a greater incentive for the supplier and customer to improve the efficiency of their relationship.

Dedert Corporation should enter into a long-term contract with Blue Star Energy because the potential for post-relationship supplier cost reduction is large. A long-term contract provides Dedert with a greater incentive to reduce production costs. Since this type of energy production is relatively new, there would be significant opportunities for Dedert to make technological improvements in the production of its filtration equipment. Likewise, opportunities for cost reductions should be significant as this technology evolves. 3. First, we must calculate the marginal cost for Envigorate when doing business with ABC Electric. The equation we use is Breakeven = marginal cost + fixed cost. We’re given the breakeven and fixed cost amounts, making the formula 72 = X + 50. Solving for X, we get $22 as the marginal cost. Now, we know ABC Electric has offered $67. We subtract the marginal cost from that number, $67-$22 = $45 – which means Envigorate receives a payoff of $45. Envigorate should do business with ABC Electric because $45 is higher than the company’s marginal cost of $22. ABC’s offer of $67 still will not cover Envigorate’s fixed costs, however, fixed costs are a sunk cost and should not be considered, and the offer will more than cover the marginal cost. ABC can hold up Envigorate because of its proximity to Envigorate’s plant. Although ABC may not know the details of XYZ’s cost structure (breakeven, etc.), ABC does know that XYZ would have significant transportation expenses if it supplied to Envigorate. This knowledge puts ABC at an advantage and allows the company to make the $67 offer that’s below the breakeven for Envigorate.

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