Business Management

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BusinessManagement

P14.4GUEST WATCHES

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Status quo

Level 1

Level 2

Level 3

Level 4

Additional Training Cost

$ –

$ 80

$ 200

$ 350

$ 550

Additional Prevention/ Compliance

$ –

$ 180

$ 240

$ 340

$ 490

Total Rework/ Scrap Cost

$ 500

$ 300

$ 150

$ 75

$ 25

Total Warranty Costs

$ 350

$ 280

$ 140

$ 80

$ –

Contribution Margin on Additional Sales

$ –

$ 600

$ 1,000

$ 1,200

$ 1,300

Net Benefits

$ (850)

$ (240)

$ 270

$ 355

$ 255

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  1. Analysis of estimated annual net cash flows for each alternative level (all dollar amounts are in thousands).

Accordingto the analysis above, Guest Watches should implement level 3 sinceit yields the maximum amount of net benefits. This level would enablethe manufacturing company to have a cash flow of $ 355,000 which isthe highest cash flow as compared to all other levels. Despite thefact that level 4 has the highest contribution margin on additionalsales, its net benefits are $ 100,000 less than that of level 3.

b)Theanalysis of the policy recommendation done by Guest Watches divisionmay not be acceptable to the management of Guest Fashions’. Themanagement of the watches division is mainly focused on theadditional profits that it can raise in the division. Since thecompensation of the management is closely tied to the operatingprofits, they are likely to compromise the quality of products tominimize costs and achieve high profits. However, the poor qualityproducts will, in turn, affect the other product lines of GuestFashions (spill-over effect). So the senior managers of GuestFashions will make a decision that gives benefit while maintainingthe quality of products. That is because their compensation is basedon the total profits of the firm and not just a single division.

P14:2CHATEAU NAPA

Cost of quality

Expected quality

Selling price

Attained profit

Profit bonus

Quality bonus

Total bonus

$ 90.00

90.00

$ 570.20

$ 30.20

0.020

0.000

0.020

$ 95.00

91.08

$ 576.44

$ 31.44

0.144

0.054

0.198

$ 100.00

92.10

$ 582.34

$ 32.44

0.234

0.105

0.339

$ 105.00

93.08

$ 588.00

$ 33.00

0.300

0.154

0.454

$ 110.00

94.01

$ 593.38

$ 33.38

0.338

0.201

0.539

$ 115.00

94.90

$ 598.52

$ 33.52

0.352

0.245

0.597

$ 120.00

95.75

$ 603.44

$ 33.44

0.344

0.288

0.632

$ 125.00

96.57

$ 608.17

$ 33.17

0.317

0.329

0.646

$ 130.00

97.35

$ 612.69

$ 32.69

0.269

0.368

0.637

$ 135.00

98.11

$ 617.08

$ 32.08

0.208

0.406

0.614

$ 140.00

98.83

$ 621.24

$ 31.24

0.124

0.442

0.566

$ 145.00

99.53

$ 625.28

$ 30.28

0.028

0.477

0.505

Fromthe above analysis, it is clear that the managers receive a maximumbonus by spending $125 on quality. Therefore, we expect them to spend$125 on quality and to achieve a quality level of 96.57. The expectedprofit per two-bottle set to be earned is $33.17. Finally, themanagers expect to receive a bonus of 64.6%.

Tomaximize firm’svalue,ChateauNapawould wantthemanagersof Redwood Cabernet Sauvignon to spend $145 on quality therebyachieving aquality level of 99.53 and a profit of $30.28.

Themanagers are always focused on maximizing their benefit. In thisscenario, they choose the option that allocates them a maximum bonus.As for ChateauNapa,maximizing firm’s value is producing products of high quality sothat they can receive a good ranking. As a result, the company willincur a high cost to produce high-quality wine.

Theabove scenario clearly explains the term, “You can only maximize inone dimension at a time.” If a company chooses to make maximumprofits, then it has to compromise on quality. However, if a companychooses to make goods of the best quality, then it has to be ready toattain reduced profits (Wu,2012).&nbsp

References

Wu,F. (2012).&nbspImplicitincentives in international joint ventures: An experimental study.Wiesbaden: Springer Fachmedien Wiesbaden.

Business Management

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BUSINESS MANAGEMENT 1

BusinessManagement

UniversityAffiliation

1. What are thebasic elements of Outback`s plan for going international?

Outback’s planfor going international can be described using several elements.Firstly, the company focuses on its relationship with suppliers. Inthis regard, Outback requires its vendors to prove that they canbuild foreign plants. Hence, the entity manifests undying commitmentto its suppliers. Furthermore, Outback has little regard forunderstanding the culture of the countries where they choose toestablish outlets. Instead, the company prefers to maintainhome-owned stores in the U.S. while franchising international units.Notably, such a strategy was presumed to suit the company’sstrength as a support operation.

Outback alsoplans to establish one franchise after another. Each project will beundertaken on the basis of established internal procedures. Thecompany plans to concentrate on franchise partners, who share itsbeliefs and principles. In the first year, Outback endeavors to focusprogressively on Canada, Hawaii, South America, and the Far East.During the second year, the company will concentrate its efforts onGreat Britain and other European countries.

2. What do yousee as the strengths and weaknesses of this plan?

Outback will reapplenty of benefits from adopting this plan. For example, the companywill enjoy the security of using reliable suppliers. The entity willalso incur fewer costs since it will avoid the costs of understandingeach country’s culture. Moreover, the plan will enable Outback tomaximize on its ability as a support operation. Hence, the companywill be ideally placed to support international outlets. Furthermore,such a plan would allow Outback to benefit from Connerty’sextensive experience in developing franchises. In fact, the firm’spresident prioritized the trust between the company and individualfranchisees. The plan will also ensure attention to detail since thecompany plans to establish units in a progressive manner. Inaddition, careful consideration will be used to select a partner, whoshares the entity’s beliefs and principles. Such meticulouspreparation will help Outback to benefit from synergisticrelationships.

Nevertheless,Outback’s plan is limited by several factors. For instance,establishing franchises will reduce the company’s revenue indeveloped countries. Foreign outlets will have the opportunity tomake profits from their ventures after the payment of theincorporation fee. Therefore, Outback would be forced to raise thefranchise charges. Furthermore, adopting such a plan would expose thecompany to stiff competition from similar firms. Many institutionsare usually inclined to franchise international operations. The planplaces the company in a precarious position where it may have toincrease the fees quoted to foreign entrepreneurs. Consequently,Outback would be disadvantaged in comparison to other restaurantchains such as Kentucky Fried Chiecken (KFC), Burger King, andMcDonald’s. Additionally, the company risks damage to its corporateimage, especially where some franchises would fail to adapt to localcircumstances. Political instability in other countries may alsoundermine the firm’s credibility. Establishing franchises inforeign nations also poses a challenge for management. In thisrespect, Outback may be forced to outsource some of its functions.

3. What changesto the plan would you recommend to Connerty?

I would recommendConnerty to establish subsidiaries in Europe before considering theFar East. Major economies such as Great Britain, France, Germany, andItaly would provide excellent market for the company’s products.Consequently, the proceeds from European markets could be used toestablish more outlets in China, India, and Japan. The latter outletswould experience more success since they took advantage of a largeconsumer markets.

4. Given what youknow from the case, do you think Outback should try the internationaljourney?

Indeed, Outbackshould try the international plan since the global market offeredplenty of growth opportunities. The unprecedented success enjoyed byfirms such as McDonald’s, Pizza Hut, Taco Bell, and KFC justifiedthe expansion efforts. Furthermore, the company could benefit from astable and meticulous approach to ensure success in its foreignventures.

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