1-1,1-2,1-3. Goal Alignment at a Small Manufacturing Concern: The owners of a small manufacturing concern have hired a manger 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 the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.

1-1. a. Plot the annual compensation of the vice president as a function of annual profit.

b. Assume the company will be worth $10 million in five years. Plot the profit of buying the company as a function of annual profit.

1-2. Does this contract align the incentives of the new vice president with the profitability goals of the owners?

1-3. Redesign the contract to better align the incentives of the new vice president with the profitability goals of the owners.

2-4. France's Labor Unions Force Early Closing Times: In 2013, France's labor unions won a case against Sephora to prevent the retailer from staying open late, and forcing its workers to work "antisocial hours." The cosmetics store does about 20% of its business after 9 P.M., and the 50 sales staff who work the late shift are paid an hourly rate that is 25% higher than the day shift. Many of them are students or part-time workers, who are put out of work by these new laws. Identify the inefficiency and figure out a way to profit from it.

2-5. Kraft and Cadbury: When Kraft recently bid $16.7 billion for Cadbury, Cadbury's market value rose, but Kraft's market value fell by more. What does this tell you about the value-creating potential of the deal?

3-1. Fixed-Cost Fallacy: Describe a decision made by your company that involved costs that should have been ignored. Why did your company make the decision? What should they have done? Compute the profit consequences of the change.

3-3. Hidden Cost of Capital: Does your company charge your division for the capital that it uses? If not, does this lead to bad decisions? What can be done to fix the problem? Compute the profit consequences of the change.

3-4. Sunk Cost of Depreciation or Fixed Cost of Overhead: Does your company make decisions based on depreciation or overhead? If so, does this lead to bad decisions? What can be done to fix the problem? Compute the profit consequences of the change.