1. The Firm as a Production Function
Objective: Maximize Profit
Labor
Firms
Output
Capital
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

2. The Firm as a Contractual Focal Point
Employees
Suppliers
Labor Unions
Insurance Providers
The Firm
Stockholders
Bondholders
Banks
Customers
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

3. Conflicts within the firm
Owners vs. Managers
Top Managers vs. underlings
Creditors and stockholders
Managers and labor unions
Buyer-supplier conflicts
Partner-owners may free ride on each other’s effort
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

4. Divisional Performance Evaluation
Cost Centers
Expense Centers
Revenue Centers
Profit Centers
Investment Centers
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

5. Cost Centers Objectives – Are these equivalent? Decision Rights
Minimize Costs for a given output
Maximize Output for a given budget
Minimize Average costs
Decision Rights
Input mix
Requirements
When would a cost center be appropriate?
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

6. Marginal, Not Average Price MC AC Output
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

7. Marginal, Not Average Price MC AC Demand Output MR
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

8. Expense Centers Maximize service given budget Problems Solutions
If users aren’t charged for the service they will overuse it.
Managers sometimes build empires
Solutions
Benchmark size against other firms
Place under the control of the largest user
Example: Accounting department
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

9. Revenue Center Maximize revenue given price and budget Problems
Can’t let managers set prices
Central management must set the product mix or sales will focus on expensive items.
Example: Sales, distribution and service
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

10. Profit Center Objectives Decision Rights Requirements Actual profit
Actual profit vs. Expected Profit
Expected Present Value of current and future profit
Decision Rights
Input mix
Product mix
Selling prices
Requirements
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

11. Investment Centers Objectives Decision Rights Requirements
Maximize ROA = (Acct Net Income)/(Total Assets)
Decision Rights
Input mix
Product mix
Selling prices
Capital invested
Requirements
Problems:
This is not a measure of profit and may cause managers to avoid investments with lower ROA that would lower profitability.
High ROA projects are frequently risky
Near retirement executives may take high short term ROA that are poor in the long term
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

12. Investment Center Problems
ROA may cause managers to avoid profitable projects with low ROA
Risky projects often have high ROA
Near retirement managers may adopt projects with high short term ROA
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

13. Transfer pricing Costless Information
Rule: The most profitable transfer price is equal to opportunity cost.
Retail in the US P = $15
Manufacturing MC = $5 AC =$20
European Retail P = $20
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

14. Transfer Pricing: Who Can You Trust?
Successive Monopoly / Double Monopoly Markup
Price
Manufacturing
Price
Retail D D 85 60 MC 10 MC MR MR 5 11
Quantity 5 11 22
Quantity MR
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

15. Transfer Pricing: Common Methods
Market Based Transfer Price
Competitive prices minimize long-run costs
Beware of synergies
There may be costs of writing and enforcing contracts with others
Marginal Production Cost (MPC)
MPC may not be MC
May not be relevant near capacity
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

16. Transfer Pricing: Common Methods
Full Cost Transfer Prices
May work well when near capacity
Doesn’t maximize profit
Negotiated Transfer Prices
The right people are at the meeting
Time consuming
Negotiating skills are critical
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

17. 17-1
Auto-fit is a multidivisional firm that produces auto parts. It has the capacity for annual production of 100 units of a particular part. The marginal cost of producing each unit is $10. These units can be sold internally either to other divisions or to external customers. The external market price is $20. The allocated share of corporate overhead for each part produced is $5. Total corporate overhead expenditures do not vary with the production of the part. How many units of the part should the company produce? What is the theoretically correct transfer price (should the company decide to transfer the part internally)?
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.

18. a. What is the likely reason for the under-forecasting?
17-4 The Xtrac Computer company is organized into regional sales offices and a manufacturing division. The sales offices forecast sales for the upcoming year in their territories. These figures are then used to set the manufacturing schedules for the year. Prices of the computers are determined by corporate headquarters and the sales people are paid a fixed wage and a commission based on sales. The regional sales offices are evaluated as revenue centers. The regional sales manager is paid a small wage (about 30% of pay) and a commission based on the sales of her territory that exceeds the budget (about 70% of pay).
Xtrac has a notoriously bad track record for forecasting computer sales. Its budgets always under-forecast sales, and then, during the year, manufacturing scrambles to produce more units, authorizes labor overtime, and buys parts on rush orders. This drives up manufacturing costs. In fact, Xtrac even under-forcasts sales when the economy is slow.
a. What is the likely reason for the under-forecasting?
b. Propose solutions to the problem
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.