Agency theory is simply one way used to describe how people may behave in a corporate environment. By referring to this theory, rules and regulations can be constructed around this expected behavior to direct outcomes in a way that is likely to be beneficial for all concerned. Considering this ground knowledge answer the questions that follow:

Note: Parts (A) and (B) are independent questions.

Part A

Consider Devi a newly employed worker in a chocolate factory who has a performance meeting with the Floor Manager. They agree on a performance contract that sets Devis weekly output to a minimum of 50,000 cherry-covered chocolates. Will this performance agreement between Devi and the Floor Manager give rise to agency theory? Why or why not? (3 marks)

(Word Limit: 200 words)

Part B

The board of Infinity Ltd is considering business proposals from two major suppliers who are competing for work:

Prime Merchants Ltd offers the first proposal that would create significant economies of scale and Infinity Ltd will save almost $2 million every year. Further, Prime Merchants Ltd offered each of the directors of the board an all expenses weekend away; as well as a gift of $50,000 each if the proposal is accepted by Infinity Ltd.

Galaxy Ltd offers the second proposal, it would not only save Infinity Ltd $2 million every year but it would also result in a guaranteed increase in revenue of $1 million. Besides that, there are no other significant differences between the two proposals.

i. In terms of agency theory, which proposal will the agent accept and why? (5 marks) (Word Limit: 300 words)

ii. Agency theory assumes that the agents are in a position of power since they have access to information and are in a position to make decisions. Justify how can the board of Infinity Ltd highlight this assumption.