Instructions: Read the following scenario below and offer a comprehensive soluti
ID: 1226110 • Letter: I
Question
Instructions: Read the following scenario below and offer a comprehensive solution to each problem. Also write a solution and which you do the following for each case:
Analyze the key economic issues in the case.
Recommend three different business solutions to the case using managerial economic models and methods.
Justify the role of managerial economics by identifying the metrics you would use to assess the success of your decisions.
Scenario
In 2005, BB Gunn took over his father's network of 15 forklift dealerships. BB had just receive his MBA, and he was eager to show his dad that he knew how to manage the business. BB began with a weekend "strategy retreat" where he brought the various epartment heads together at a resort. BB thought the meeting went well, and they emerged with a coherent longrange strategic plan to guide the company through the next five years.
However, when BB returned to work the following Monday, he discovered that he had a more immediate problem. The rental divison, headed by a former salesman, needed a cash infusion to keep operating. This was puzzling to BB because the accounting statements indicated the division was generating profit even though it was clear that the division was running out of cash.
After a few hours of going over the books, BB discovered that the rental divison was selling its forklifts after five years and then buying new forklifts. Purchasing the new machines was eating up cash, but it did give the company a significant advantage over their rivals: their rental fleet was much newer (three years ) than their rival's (seven years).
Explanation / Answer
Problem solving framework can be figured out after finding the problems. In this scenario, three problems and its business solutions using managerial economic models and methods are as follows:
1. Who is making bad decisions?
The rental divisional managers selling forklifts too early, as result it gives an advantage over rivals because consumer prefers newer machines to older ones. However, selling machines, before their economic life is up, and purchasing new machines increases the economic loss as the age advantage is not enough to offset with newer ones. Purchasing new machines requires high cash, which leads to cash shortage. Moreover when forklifts are sold after five years, their accounting value is zero, so they can sell it any price, and still would fetch accounting profits. There is a high possibility that the sales manager sells the used forklifts to his friend, who resells used forklifts at higher price, and then splits the profits with sales manager. Best business solution would be start depreciating the forklifts over ten years, and replacing the fraud managers.
2. Does the business maker have enough knowledge to make a wise decision?
The rental divisional manager who was former salesman knows that machine is being sold too early. His background is in sale, so perhaps he lacks information and unaware of the facts. Replace the manager, the problem will disappear too.
3 Does the business maker earn incentive to make a good decision?
Divisional manager performance is evaluated on the basis of accounting profit of the division. To earn incentives Divisional manager is not making good divisions. It’s using a straight line method of depreciation for the forklifts, and after every 5 years the rental division sells them at any price they fetch, and earn high accounting profits. Purchasing the new machines eats up cash. Now if instead of five years company starts depreciating forklifts over ten years, profits will be increased to double and this will turn cash flow positive