9781118041581

Summary 621

that headquarters is in the dark. Using a bonus system, headquarters also

wants to encourage the manager to strive for maximum plant output.

a. Headquarters decides to use the bonus system:

where the plant manager forecasts the likely output QT. If actual

output Q exceeds QTat the end of the year, the bonus increases. If Q

falls short of QT, the bonus is reduced. Under this system, will the

manager report the plant’s true capacity, 10,000 units? Explain.

b. Suppose instead that headquarters uses the following bonus system:

Will the manager report the plant’s true capacity? Will the manager

strive for maximum output? Explain.

Discussion Question

a. In 1999, Procter & Gamble and Ford Motor Co., two of the world’s largest

spenders on advertising, changed the way they paid their advertising

agencies. Formerly, these agencies’ fees were set as a percentage of each

firm’s total advertising spending (primarily through television, magazines,

and newspapers). The agencies focused their efforts on large campaigns

built around impact ads. The new system pays the agency a modest base

fee (based on spending) plus an incentive fee that varies directly with the

total sales of the products promoted by the ads. How do you think

agencies will react to the new system? Is the new pay structure better for

one or both sides than the old one? Explain.

b. Exide Corp., a worldwide battery maker, built its organizational

structure on 10 separate country units. Country managers, particularly

in Europe, aggressively sought to expand their sales and profits—by

price cuts, exports, and advertising—frequently in competition with the

company’s other geographic units. After much deliberation, the

company made a dramatic organizational change, abolishing its

geographic units and dividing its structure into six global product lines

(automotive batteries, industrial batteries, consumer batteries, and so

on). What are the potential advantages and disadvantages of this

organizational change?

c. As reported by journalist Malcolm Gladwell, many poor people who can’t

afford medical insurance, are destined to make poor health decisions. For

instance, they skimp on children’s checkups and preventive care, and fail

to treat chronic conditions such as depression. They feel they cannot

afford to pay out of their own pockets for basic care. (The leading cause

of personal bankruptcy in the United States is unpaid medical bills.) A

B.4QT.5(QQT), if QQT.

B.4QT.3(QQT), if QQT, and

B.5(QQT),

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