...substitute for the steel rings. His idea comes from one of his competitor, Henri Poulenc who has already implemented this new product in the market. Precision Worldwide Inc is currently in the dilemma of determining how to go about the introduction of a new Japanese prototype of their steel ring. The Japanese were able to reinvent this plastic ring at a lower cost and more durable at the same time. This is extremely detrimental to the steel ring market and will force Precision Worldwide out of business if action steps are not taken. Some of the factors that Precision Worldwide will be facing are how to deal with their excessive inventory levels of steel rings and how to strategically enter the plastic ring market. Hans Thorborg needs to take into account the sunk cost of the steel ring market and how to be effective with the production of the plastic ring. Hans Thorborg needs to realize that the cost of the steel ring is actually a sunk cost. The actual cost of the steel ring is 2.95$ when all sunk costs are taken out from the original number of $6.76. Whether or not the steel rings sell, well over 50% of the cost is considered sunk and is irrelevant. The second aspect...
Words: 649 - Pages: 3
...Case Study: The Brita Products Company CASE SUMMARY Situation Analysis: In 1988 Charlie Couric, a marketing executive at Clorox, oversaw the acquisition by Clorox of the right to market Brita Water Purifier Pitchers in United States, and then became the President and General Manager of Brita USA. He proposed a risky deficit-spending strategy to gain market with the goal of getting a Brita water pitcher on every kitchen countertop in the United States. As a result Brita USA incurred heavy losses upfront as initial sunk costs dwarfed any revenue from sales, and the company saw no profits in its first 4 years. Couric however, believed that in the long run the strategy would pay off as once Brita had achieved enough market share the company would make back its losses through repeat sales for pitcher filters. Time proved Charlie Couric right in that, for while the pitchers were developed at a high cost, the lower costing filters saved the consumer more money in the long run and became the main source of revenue for Brita. By 1999 Brita had sold 17 million pitchers and had close to 200 million in revenues per annum. Brita now enjoyed a 70 market share of home water purification industry. Problem: In 1999, Brita now faces a new competitor in the water purification industry, with a new product. PUR, the only competitor to Brita with double digit market share, announced that it would be spending $40 million in advertising and promotion to support the launch of...
Words: 1114 - Pages: 5
...objectives and measures can be established and managed. The strategy map provides the missing link between strategy formulation and strategy execution. (Norton and Kaplan, 2004 *1) Furthermore, DC won't only focus on the financial report; they also manage by human resource and other strategic elements. Also, any of the above financial calculations or assumption could bring the wrong settlement or the expectations will be seriously biased. Economic / Financial Analysis Transportation Costs The transportation division asked that the cost of tank cars required for additional throughput should be involved in the initial outlay of the Merseyside's project was ignored by Frank Greystock. Therefore, he was not involved in the analysis of the Merseyside project. Regardless of how departmental budgets are established, best practices in capital budgeting clearly state that all side-effects of a project must be included in cash-flow projections (Schiff, 1988 *2). In fact, transportation costs have a...
Words: 929 - Pages: 4
...What is the Sunk Cost Fallacy? How can it be a positive thing to quit? The Sunk Cost Fallacy is when we invest too much time or money into something which makes the goal hard to abandon. Because one does not wish to abandon the the project it creates a fallacy since while continuing to endure the goal you use even more resources. Essentially we have this idea that our failure can be rescued if we continue on. It can be a positive thing to quit because you are carrying a burden of doing something you know you are going to fail or something you do not even want to do. By quitting you open doors to better options that can make you happier. When you quit there is a potential for new experiences that you would not have known about if you would...
Words: 1277 - Pages: 6
...recommend that we should accept this project. For the Beta calculation, I collect the industry data and average them to get the average asset data, which I think is more reasonable to explain the level of the risk for the ChampSport INC. Then I conduct the equity beta for ChampSport is 1.01. Finally, I got the 7.43% as the result of the WACC. (See Comparable Firm sheet) After that, I do the NPV analysis. When calculating the Operating Cash Flow, I decide to omit the expense of the research and development cost since it is the sunk cost and will not affect the future project and profit. I also assume that the annual increase rate for price of the product is 2% and annual growth rate of sales is 10%. By doing that, I generate the operating cash flow and finally get the NPV $11,227,508 and IRR 18.54%. Based on our assumption, the NPV shows that really bright future and profit ability for this project. Finally, I also did the NPV sensitive analysis to see how much the effect of WACC, annual growth rate of price and sales to the NPV. We can see that with the growth of the WACC to 12%, the NPV decreases to $5,355,268 and still keeps high positive. For the table of the NPV sensitive, we could find that annual growth rate of price ranges from 0% to 2% and growth rate of sales ranges from 5% to 20%, the NPV is still keep positive. And under the worst scenario assumption, the NPV is $5,838,024. (Price 0% and sales 5%, see Project Pro Forma sheet) Therefore, based on our analysis, the...
Words: 376 - Pages: 2
...Using the Accenture document on governance presented with the Alcan case, place Canadian Shield in the appropriate quadrant. According to the Accenture document, I would place Canadian Shield within the efficient, predictable operator category. The slow rate of change and need to compete on operational efficiencies characterized by most companies in this quadrant is detailed by the following quote from the case authors. “Sustainability for Canadian insurance companies greatly depended on investments in projects that increased customer service and improved operational efficiency.” This comment is aligned with the predictable operator company practices and is evidence that in order to gain a competitive advantage in the Canadian insurance industry it is vital that operational efficiencies are realized through better IT solutions at Canadian Shield and its parent company, Assurance Centrale Inc. (AC). In the key decision going forward, is this Seamus' call? If not, whose decision is it? Who should make the decision? Under what decision area(s) in the Weill & Ross governance model does this decision fall? As the leader of Information Systems at Canadian Shield, one of many subsidiaries of Assurance Centrale, Seamus Reynolds was tasked with piloting a new information system that could potentially replace the IS’s at all of Assurance Centrale’s regional offices. Five years after starting this project he was feeling the weight of the responsibility for a project that could...
Words: 797 - Pages: 4
...practices of these organizations. As a matter of fact, in times of high demand the attractiveness for collusion drops significantly to a point where the defection is inherently triggered (Shakkil Hassan 2006). The incentive for deserting comes from the short-term benefits companies can obtain by undercutting their competitors and therefore gain all the market share. It’s a common practice in cartels to limit outputs and capacity so that prices stay high but in times of high demand the market asks for more quantity of the same good which is tempting for firms to expand their output, by augmenting capacity and therefore reducing prices to reach all customers. This also brings along economies of scale because companies can now spread fixed costs over a larger production they have. This is especially tempting for small firms, because these are trying to penetrate the market and gain market share and therefore the punishment received for this deviation may not outweigh the actual defection. Ultimately (according Rotenberg and Saloner 1986), in times of high demand, the arrangement within a cartel will...
Words: 1742 - Pages: 7
...What Does Marginality Mean? By Robert Murphy 8/11/2004 What does it mean to act "on the margin" or to think in terms of "marginality?" Economists use the term often. On the very first day of my principles courses, I teach my students that people make decisions "on the margin." Of course, this pronouncement is greeted primarily with looks of resigned boredom and/or helplessness. I try to clarify by saying that if we look at a piece of paper, the margin is just the edge, not the entire sheet. This explanation also does little good. The fact is, economists are so used to marginal thinking that they have a hard time explaining it to someone who's never heard of it before. And so what I do is jump quickly into some examples. The Water-Diamond Paradox The most famous application of marginalism is the solution to the so-called water-diamond paradox, which seemed to stump Adam Smith in his Wealth of Nations.[1] The problem is this: Why do diamonds have a higher exchange value than water, when diamonds are a mere frippery while water is essential to life? Shouldn't people be willing to offer more in exchange for a unit of water than for a unit of diamonds? The solution, of course, is that no individual is ever in the position of choosing between all of the diamonds in the world and all of the water in the world. A given choice is made on the margin. If offered a choice between a cup of water and a handful of diamonds, most people would pick the latter because the marginal...
Words: 1313 - Pages: 6
...In summary the article, as our book, points out that walking away from sunk cost is not as easy as it reads in black and white. The managers and investors are in most cases, financially and emotionally embedded in the project. So one step can be added – will this additional investment return more than 1x the additional funds? With our new economy, you may find ONE project where additional funds may yield a return, “letting deal fatigue block the clarity of thinking around real marginal returns is also not smart” [1]. Nonetheless in the majority of cases, you will find that you are throwing money into a project that you can’t save. I choose sunk cost because it’s seemed so simply to me to walk away from a deal that was money pit. Until my company had to do it. We had brought an office building in 2008 right before the market collapse. We invested $1.5 million in lobby renovations, parking lot, elevator, electrical repairs and roof replacement. I must say it was gorgeous from tile chosen for the floor, to the chandeliers and art work. The building was 70% occupied by the corporate offices of a major supermarket chain, in Northeast Coast. In mid 2009 they went bankrupt and abandoned the building and their lease. With the economy in shambles we were unable find new tenants, regardless of the incentives offered. The building was sold 2011 for 60% of our purchase price. We walked away from all the time and money vested in renovations and in keeping the building operational. I...
Words: 289 - Pages: 2
...هتان الكفوف تفخربك العرباني **** ---------------- ياسنًد للرُبانــــي **** ----------------- Linear Programming Applications Chapter 4Linear Programming Applications 2.a.Let x 1= units of product 1 produced x 2= units of product 2 producedMax 30 x 1+ 15 x 2s.t. x 1+0.35 x 2 ≤ 100Dept. A0.30 x 1+0.20 x 2 ≤ 36Dept. B0.20 x 1+0.50 x 2 ≤ 50Dept. C x 1, x 2 ≥ 0Solution: x 1= 77.89, x 2= 63.16 Profit = 3284.21b.The dual price for Dept. A is $15.79, for Dept. B it is $47.37, and for Dept. C it is $0.00. Thereforewe would attempt to schedule overtime in Departments A and B. Assuming the current laboravailable is a sunk cost, we should be willing to pay up to $15.79 per hour in Department A and upto $47.37 in Department B.c.Let x A= hours of overtime in Dept. A x B= hours of overtime in Dept. B x C= hours of overtime in Dept. CMax 30 x 1+ 15 x 2-18 x A-22.5 x B-12 x Cs.t. x 1+0.35 x 2- x A ≤ 1000.30 x 1+0.20 x 2- x B ≤ 360.20 x 1+0.50 x 2- x C ≤ 50 x A ≤ 10 x B ≤ 6 x C ≤ 8 x 1, x 2, x A, x B, x C ≥ 0 x...
Words: 274 - Pages: 2
...STATEMENT OF THE PROBLEMS How the resorts pursue its plan? V.STATEMENT OF ALTERNATVES a) Improving the work environment b) Improving HR practices c) Organizing for employee retention VI.SELECTING BEST ALTERNATIVES Improving the work environment VII.CONCLUSION In the world of business, the high rate of employee turn-over can be a significant problem. Economic research suggest that for some industries it can cost up to one-fifth of an employee’s annual salary to find, train and hire a suitable replacement. If turn rates are too high, this represents a significance sunk cost for the company that can be recouped. VIII.ACTION PLAN By improving the environment at work by means of paying more, offer potential for advancement, rebalance the work load, offer competitive benefits, encourage friendly employee relationships, trust your employee’s with responsibility and ensuring that the company is optimally-organized, it’s possible to keep turnover at a healthy minimum. So that, for now the company cannot pursue their plan to expand because it cost high, and their...
Words: 323 - Pages: 2
...AND PRICING DECISIONS Costing and Pricing Decisions Cost Allocations Cost allocation is the process of assigning the indirect costs of producing a product. These indirect costs may be shared by multiple products. This is where cost allocation comes into play. Indirect costs can be allocated to products, services and departments. Cost allocation allows a company to calculate fully cost of their products. This provides them the ability to price products accurately. Three common costs that need to be considered when allocating costs include joint costs, sunk costs and opportunity costs (Jiambalvo, 2007). Joint Costs When at least two products come out of a common input they are considered joint products. Joint costs are the costs of the common input that is put into the joint products. An example of joint products would be the various types of fuels that are made from crude oil (Jiambalvo, 2007). Joint costs are commonly found in extractive, agricultural and chemical industries. They are also found in industries where different types or grades of the same product are made. It is very vital that the system used to cost the products incorporates the consumption of resources by product. If this is not done properly costs will be unclear and unprofitable products are likely to be produced (Tunes, Nyrud & Eikens, 2008). Horngren et al., 2006 wrote about four methods used for the allocation of joint costs. These Four methods are sales value at split off point...
Words: 2105 - Pages: 9
...difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects. a. True b. False (12-1) Relevant cash flows F I K Answer: b EASY 2. Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis. a. True b. False (12-1) Relevant cash flows F I K Answer: a EASY 3. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. a. True b. False (12-2) Depreciation cash flows F I K Answer: a EASY 4. The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant. a. True b. False (12-1) Opportunity costs F I Answer: a MEDIUM 5. Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated. a. True b. False (12-1) Sunk costs F I Answer: b MEDIUM 6. Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues...
Words: 1797 - Pages: 8
...Sunk Costs and Biases I believe that all personal bias comes with a common set of language and behaviors that cross racial, ethnic and gender based structures. Bias is created by a real life experience and contains both a mindset and associated behavioral characteristics. Personal bias is infused in every organization through the connection of the people that provide the services. Biases result when an individual inappropriately applies a heuristic, (Bazerman and Moore, 2012). Researchers have found that people, rely on a number of simplifying strategies, or rules of thumb, when making decisions. These simplifying strategies are called heuristics. The four main heuristics are availability, confirmation, representativeness and affect. With heuristics choice making comes personal bias which is mixed with organizational bias to create another level of systemic biased behavioral impacts. In DPS we are making decisions that impact children from a biased perspective that is not always about students first. The biases range from who is invited to present to how we structure our organizational communication and problem solving processes. Embedded within organizational culture is a bias called sunk cost. Sunk cost bias is about persisting with bad decisions due to our irrational attachment to costs that we cannot recover has become so common that you can find them just about anywhere, (LiteMind). That’s the sunk cost...
Words: 827 - Pages: 4
...with a superior and less expensive plastic ring that can replace the steel ring. The general manager of the German plant, Hans Thorborg has been considering the introduction of a similar plastic rings as a substitute for the steel rings. There is a lot of potential for this product in this market because there is a lower manufacturing cost and a greater durability compare to steel rings. The company is wondering if it is worth to shift from steel rings to plastic rings, but there are a lot of facts that they need to consider. There has been conflicting views concerning the future of the steel rings departments if they should change to plastic rings in order to acquire competitive advantage in this market and what will they do with the special steel after they have implemented the new product. A decision must be made as whether to start producing the plastic parts or continue with the steel rings. The decision focuses on three key issues involves, doing incremental analysis of what amount of overhead, materials, and direct labor are relevant in making the decision to produce the new part Contribution analysis Information supplied from PWI’s cost accounting department: Title 100 Plastic Rings 100 Steel Rings Material...
Words: 1749 - Pages: 7
