Question

Advanced Widget Systems Corporation has two divisions: manufacturing and sales. A widget is an expensive semiconductor-based device that looks high-tech and performs no useful function. These properties make widgets very popular with corporate executives.  

In the widget industry, when a new worker is hired both he and his supervisor are equally ignorant about his ability. There is no skill involved in making and marketing; however, natural ability matters a great deal. An individual assigned to marketing either sells 12 widgets a year or he sells nothing. Similarly, a production worker is either able to produce 12 widgets a year or he is not able to produce any widgets at all. It is known that: • Everybody capable of selling widgets is capable of making them; • One out of four people can both sell and make widgets • Two out of four people are making widgets A probationary period under expensive managerial supervision is necessary in order to learn the individual’s type. The costs associated with the probationary period in manufacturing are $10,000. In other words, at a cost of $10,000 the firm can learn if a particular worker is capable of producing widgets. In order to evaluate the individual’s marketing ability, a more expensive screening procedure is needed. It costs $30,000 to find out if a person is able to sell widgets. Currently, this firm is hiring entry level workers only into manufacturing. Those who do not show themselves as able widget-makers are dismissed after probation. Some of the able widget-makers are retained in manufacturing, while others are given an opportunity to do probation in marketing. That is, they are screened for ability to sell widgets, at a cost of $30,000 to the company. Those who fail in marketing are sent back to the widget manufacturing division.

Can this policy be improved? Which of the following options best describes your answer? Briefly explain.

i. The firm will do better by hiring some of the workers directly into marketing. It makes little sense to take an able widget-maker from manufacturing and send him to costly marketing probation knowing that he will fail there with a probability of 0.5.

ii. The company will do better by firing workers who failed in marketing.

iii. The firm can improve its profits by hiring workers only into marketing, where their ability to sell widgets is tested, and then transferring some into manufacturing

iv. The firm is following the optimal screening strategy.

Answer 1

In my opinion, the best strategy for the company will be:-

i. The firm will do better by hiring some of the workers directly into marketing. It makes little sense to take an able widget-maker from manufacturing and send him to costly marketing probation knowing that he will fail there with a probability of 0.5.

Reason:- As in the case, It is presented that the candidates are first tested for their manufacturing ability which costs $10000 and then this candidate is sent to marketing which costs $30000 so for a particular worker the total expense is $40000. If the candidate fails in marketing he is sent back to manufacturing. If the company does for hiring the employees directly to the marketing department, then it will save $10000 as in the case one of the assumptions is Everybody capable of selling widgets is capable of making them. So if the candidate is good at selling, he will also be good at producing. This is how by selecting some candidates directly to marketing will save $10000.