Question

BK Books is an online book retailer that also has 10,000 "brick and mortar" outlets worldwide. You are a risk-neutral manager within the Corporate Finance Division and are in dire need of a new financial analyst. You only interview students from the top MBA programs in your area. Thanks to your screening mechanisms and contacts, the students you interview ultimately differ only with respect to the wage that they are willing to accept. About 10 percent of acceptable candidates are willing to accept a salary of $140,000, while 90 percent demand a salary of $190,000. There are two phases to the interview process that every interviewee must go through. Phase 1 is the initial one-hour on-campus interview. All candidates interviewed in Phase 1 are also invited to Phase 2of the interview, which consists of a five-hour office visit. In all, you spend six hours interviewing each candidate and value this time at $2,500. In addition, it costs a total of $8,000 in travel expenses to interview each candidate. You are very impressed with the first interviewee completing both phases of BK Books's interviewing process, and she has indicated that her reservation salary is $190,000. Should you make her an offer at that salary or continue the interviewing process? Explain.

Answer 1

*Answer:

A cost benefit analysis needs to be done to analyse the cost of conducting an additional interview to hire a suitable financial analyst who is ready to work for a pay worth $140,000.

The Expected benefit of searching an notable interviewee (who gets $70000 worth of pay) is: the percentage of students who are willing to accept $140,000 salary multiplied by the difference between the highest salary and the lowest salary).

Highest salary = $190,000

Lowest salary = $140,000

Expected Benefit = 10%(190,000 - 140,000) = $5000

Cost of conducting another interview = cost of time + cost of travel = $2500 + $8000 = $10,500

It an be seen that the cost of conducting an additional interview exceeds the expected benefit.

Therefore, we should hire that interviewee instead of continuing with the interviewing process.

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