EMU ELECTRONICS

Emu electronics is an electronics manufacturer located in Box Hill, Victoria. The company’s managing director is Shelly Chan, who inherited the company from the father. The company originally repaired radios and other household appliances when it was founded more than 50 years ago. Over the years. The company has expanded, and it is now a reputable manufacturer of various specialty electronics items. Robert McCanless, a recent MBA graduate, has been hired by the company in the finance department.     

One of the major revenue-producing items manufactured by Emu electronics is a smart phone. Emu electronics currently has a smart phone model on the market and sales have been excellent. The smart phone is a unique item in that it comes in a variety of colours and is pre-programmed to play Jimmy Barne’s music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Emu electronics has spent $1 200 000 developing a prototype for a new smart phone that has all the features of the existing one, but adds new features, such as Wifi tethering. The company has spent a further $250 000 for a marketing study to determine the expected sales figures for the new smart phones.

   Emu electronics production manager has produced estimates of the costs associated with manufacture of the new smart phone. Variable costs are estimated at $210 per unit and fixed costs for the operation are expected to run at $5.3 million per year. The estimated sales volume is 64 000 units in the year 1; 106 000 units in the year 2; 87 000 units in the year 3; 78 000 units in Year 4; and 54 000 units in the final year. The unit price of the smart phone will be $515. The necessary manufacturing equipment can be purchased for $38.5 million and will be depreciated for tax purposes over a seven-year life (straight-line to zero). It is believed the value of the manufacturing equipment in five years’ time will be $5.8 million.

    Net working capital for the smart phones will be 20% of sales and will have to be purchased at the end of the year. The cost of the raw materials is reflected in the variable unit cost. Changes in NWC will first occur at the end of Year 1 based on the first years’ sales. Emu electronics has a 30% corporate tax rate and a 12% required return.

    Shelly has asked Robert to prepare a report that answers the following questions.

Questions

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project?

5. How sensitive is the NPV to changes in the price of the smart phone?

6. How sensitive is the NPV to changes in the quantity sold?

7. Should Emu electronics produce the new smart phone?

8. Suppose Emu electronics loses sales on other models because of the introduction of the new model. How would this affect your analysis?

MIni Case

EMU Electronics

Emu Electronics manufacturer located in Box Hill, Victoria. The company's managing director is Shelly Chan, who inherited the company from her father. The company originally repaired radios and other household appliances when it was founded more than 50 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. Robert McCanless, a recent MBA graduate, has been hired by the company in the finanace department.

One of the major revenue-producing items manufactured by Emu Electronics is a smart phone. Emu Electronics currently has one smart phone model on the market and sales have been excellent. The smart phone is a unique item in that it comes in a variety of colours and is pre-programmed to play Jimmy Barnes music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Emu Electronics has spent $1200000 developing a prototype for a new smart phone that has all the features of the existing one, but adds features, such as Wifi tethering. The company has spent a further $250000 for a marketing study to determine the expected sales figures for the new smart phone.

Emu Electronics' production manager has produced estimates of the costs associated with manufacture of the new smart phone. Variable costs are estimated at $210 per unit and fixed costs for the operation are expected to run at $5.3 million per year. The estimated sales is 64000 units in Year 1; 106000 units in Year 2; 87000 units in Year 3; 78000 units in Year 4 and 54000 units in the final year. The unit price of the new smart phone will be $515. The necessary manufacturing equipment in five years time will be $5.8 million.

Net working capital for the smart phones will be 20% of sales and will have to be purchased at the end of the year. The cost of the raw materials is reflected in the variable unit cost. Changes in NWC will first occur at the end of Year ! based on the first year's sales. Emu Electronics has a 30% corporate tax rate and a 12 % required return.

Shelly has asked Robert to prepare a report that answers the following questions:

1. What is the payback period of the project?

2. What is the profitability index of the project?

3. What is the IRR of the project?

4. What is the NPV of the project?

5. How sensitive is the NPV to changes in the price of the new smart phone?

6. How sensitive is the NPV to changes in the quantity sold?

7. Should Emu Electronics produce the smart phone?

8. Suppose Emu Electronics loses sales on other models because of the introduction of the new model. How would this affect your analysis?

Consider a town in which only two residents, Dmitri and Frances, own wells that produce water safe for drinking. Dmitri and Frances can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.

Suppose Dmitri and Frances form a cartel and behave as a monopolist. The profit-maximizing price is ____ per gallon, and the total output is _____ gallons. As part of their cartel agreement, Dmitri and Frances agree to split production equally. Therefore, Dmitri's profit is_________, and Frances's profit is_________.

Suppose that Dmitri and Frances have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Dmitri says to himself, "Frances and I aren't the best of friends anyway. If I increase my production to 45 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."

After Dmitri implements his new plan, the price of water (Increases or decreases?) to _______ per gallon. Given Frances and Dmitri's production levels, Dmitri's profit becomes_________ and Frances's profit becomes__________.

Because Dmitri has deviated from the cartel agreement and increased his output of water to 45 gallons more than the cartel amount, Frances decides that she will also increase her production to 45 gallons more than the cartel amount.

After Frances increases her production, Dmitri's profit becomes_________, Frances's profit becomes___________, and total profit (the sum of the profits of Dmitri and Frances) is now____________.

True or False: Based on the fact that both Dmitri and Frances increased production from the initial cartel quantity, you know that the output effect was larger than the price effect at that quantity.

True

False

Dmitri and Frances have each cheated on their cartel agreement and increased production by 45 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Dmitri's profit when he produces 90 gallons more than the cartel amount compared to his profit when he produces 45 gallons more than the cartel amount.)

Neither Dmitri nor Frances has an incentive to further increase output, nor does either have an incentive to decrease output. This outcome is an example of   .

A) resale price maintenance

B) predatory pricing

C) a Nash equilibrium

D) tying

Question 2

Currently Sam and Carla have the only taxi services in a small town. Both Sam and Carla are thinking about discounting their respective fares by 20% to attract more business.

The possible outcomes of this game are as follows.

First: Sam offers discounts, while Carla does not, which will result in Sam earning $1000 in profit and Carla earning $800 in profit.

Second: Sam and Carla both offer discounts, which will result in Sam earning $600 in profit and Carla earning $300 in profit.

Third: Sam and Carla both do not offer discounts, which will result in Sam earning $1400 in profit and Carla earning $1000 in profit.

Fourth: Carla offers discounts, while Sam does not, which will result in Sam earning $800 in profit and Carla earning $600 in profit.

a) Does Sam have a dominant (optimal) strategy? Please explain your answer.

b) Does Carla have a dominant (optimal) strategy? Please explain your answer.

c) Is there an equilibrium solution to this problem where we can predict the strategy of both Sam and Carla? Please explain your reasoning.

The town of Ballymarcove has three mobile phone providers ONE, TWO and THREE and every resident of Ballymarcove is a customer of exactly one provider. • Every year 10% of ONE customers switch to TWO and 20% switch to THREE (with 70% remaining with ONE). • Every year 30% of TWO customers switch to ONE and 20% switch to THREE (with 50% remaining with TWO). • Every year 30% of THREE customers switch to ONE and 30% switch to TWO (with 40% remaining with THREE). (a) [9 marks] Write down the transition matrix for this Markov process. (b) [8 marks] Explain why the transition matrix has 1 as an eigenvalue. (c) [8 marks] TWO is a relative newcomer to Ballymarcove and in the long term it aims to have a third of the market. Currently ONE has 60% of the market, TWO has 10% and THREE has 30%. If current trends continue, can TWO expect to achieve their aim?

The town of Bookville has a massive public library system. Bookville's municipal government faces a tradeoff between retaining the current number of library workers and replacing some of its workers with computers. The four options of workers and computers combinations available to the government are given in table below.

Number of workers

Number of computers

Choice A

30

50

Choice B

20

100

Choice C

10

150

Choice D

5

300

Computers and software cost $5,000 per year. In a non-unionized labor market, workers are paid $20,000 per year. In these circumstances, the optimal choice from a cost perspective for the Brookville city government is Choice (A, B, C, or D):
After the introduction of a strong union, the annual salary for workers increases to $30,000. In these circumstances, the optimal choice from a cost perspective for the Brookville city government is Choice (A, B, C, or D):

CRITICAL THINKING EXERCISE Ms. Anna vanDahm, one of the wealthiest and most influential people in town, was placed in the hospital's intensive care unit (ICU) after undergoing kidney replacement surgery. Because of the inability to deliver high-quality care as a result of financial constraints and a high turnover rate related to nurse discontentment with the dictatorial leadership styles of ICU nurse managers, the ICU was regularly short of qualified staff nurses. As a solution to this problem of short staffing, nurses from other units with lower levels of client acuity were routinely floated to the ICU, often without regard to whether they were cross-trained to take on ICU responsibilities. Abigail Friendly, an RN without prior training or experience in caring for ICU clients, was floated to the ICU, where she was assigned to provide care for Ms. vanDahm, who had responded very poorly to her surgery and was put on a life-support system by a physician just before Nurse Friendly's arrival. While Nurse Friendly was caring for her, Ms. vanDahm communicated, in the presence of her oldest son, that she did not want to be resuscitated in the event of cardiopulmonary arrest. When her shift ended a few minutes later, Nurse Friendly, exhausted and overwhelmed by what she had just experienced, left for home. Shortly thereafter, Ms. vanDahm sustained a cardiopulmonary arrest; however, in the absence of proper documentation and notification, she was resuscitated. Subsequently, the son, angry that his mother's request had not been followed, consulted an attorney, who promptly contacted the hospital's CEO. The next day, Nurse Friendly, who had always received highly positive performance evaluations over the 5 years she was employed by the facility and also was subject to protection under the provisions of an antidiscrimination statute, was told by the manager of her unit that she was being fired effective immediately.

1.Nurse manager of the ICU

a.On what grounds could the nurse manager be found legally liable?

b.What actions should have been taken by the nurse manager to prevent legal liability in this type of situation?

c.What ethical dilemma(s) did the nurse manager face in this situation?

d.What factors should have been considered by the nurse manager in dealing with the ethical dilemma(s) encountered in this situation?

2.Hospital

a.On what grounds could the hospital be found legally liable?

b.What actions should have been taken by the hospital to prevent legal liability in this type of situation?

Barbara owns the sole hairdressing salon in a small country town. She has estimated the demand and marginal revenue for her product.

They are P = 84 - 2Q (quantity) and MR = 84 - 4Q, respectively. She also experiences a constant marginal cost of $16.

A) What is Barbara’s profit-maximising quantity?

B) What price should Barbara charge at that profit-maximising quantity?

C) Assume the average total cost (ATC) at the profit maximising output is $20. Calculate the profit or loss Barbara makes.

D) Barbara is considering expanding the size of her salon and increasing daily output to Q = 25. Is this a good/bad idea? Why/why not?

Thank you!

Centerville psychiatric (CP) is a for-profit psychiatric hospital in a large town with two other free-standing psychiatric hospitals and with four general hospitals that have smaller psychiatric units. CP attempts to distinguish itself from its competitors by claiming to offer better doctors and more state-of-the-art structured treatment programs that combine intensive counseling and drug therapy for acute episodes for serious mental illness (so-called nervous breakdowns). This treatment approach contrasts with that in general hospitals, which is unstructured, much shorter in duration, and often administrated by non-specialists, and contrasts with other specialized psychiatric hospitals that offer long-term custodial treatment for more chronic conditions.

Consistent with its long-standing bylaws, CP’s medical staff presently consists of only board-certified psychiatrists, which are specially trained M.D.s. Alfred Zock, Ph.D. is a psychologist of good reputation with an active counseling and therapy practice in Centerville. He has decided to break the mold by applying for medical staff privileges at CP. The major practical difference between psychiatrists and psychologists is that only the former can prescribe drugs; psychologists are limited by state licensing laws to “couch therapy.” In the past, psychologists have been allowed to see CP patients who were under their care before coming to CP, but only if a staff psychiatrist approved and supervised the psychologist. Dr. Zock would like to admit his own patients directly and treat them at CP without supervision or prior approval. He has admitting privileges at one of the general hospitals in town, but he finds their facilities unsatisfactory.

They existing psychiatrists oppose Dr. Zock’s admission because they like things the way they are, for both clinical and financial reasons. The hospital administration is also not in favor, partly because it does not want to antagonize its medical staff in a competitive hospital market where they can take their patients elsewhere, and partly because reimbursement rates under managed care insurance are usually higher for drug therapy their own psychologist to be their primary physician.

            As a lawyer for CP, advise it on the safest way to exclude Dr. Zock. Consider whether to use primarily quality or economic criteria, whether to act under the existing bylaws or to change them and then consider Dr. Zock individually. Consider what procedures to follow in making these decisions.

Questions to answer….

As a lawyer for Centerville Psychiatric Hospital,

Advise it on the safest way to exclude Dr. Zock.

Consider whether to use primarily quality or economic criteria,

Whether to act under the existing bylaws or to change them,

And finally consider Dr. Zock individually.

Consider what procedures to follow

Include references.

SOMATIC CASE STUDIES

You are working in a nearly empty small-town emergency department in the middle of the night when a young woman, a Ms. Harriman, comes in holding her abdomen and sobbing. She is doubled over in pain and says, “I think I have stomach or pancreatic cancer!” She moans and says she is nauseated and says, “I threw up blood at home! Hematemesis!”

You and another intern nurse get her into a bed and draw the curtains. You hold a bedpan for her, but she doesn’t vomit. Instead, she says right away, “Is Dr. Collins on tonight? I need to see Dr. Collins. He knows my case. I’m fine alone for a moment. Just please go get him.”

You explain to her that you need to check her vital signs first, but she becomes agitated and says, “You’re wasting time! My BP isn’t elevated, my pulse and respirations, all that’s fine. I might be slightly pyretic, but I’m fine. Just please get him. Dr. Collins already knows me. Go!”

Just then you are called away by another doctor anyway, so you do leave briefly.

As it happens, Dr. Collins is on duty. You don’t relay her special request for him, but you do tell him about her as he comes away from another patient.

“Sandi Harriman?” he says. His shoulders slump, and he puts a hand to his forehead. “Not again. How many times—.” Then he looks at you. “No, I think it’s better if someone else sees her.”

You are slightly puzzled by this, but the other doctor on duty tonight, Doctor Metz, is standing nearby reviewing a chart and looks up and says, “Ah, Ms. Harriman. Yes, I agree. I’ll see her.”

Neither of them rushes to her side, however.

Suddenly Ms. Harriman makes peculiar, loud retching sounds. You return to her and see thick dark coffee-ground emesis, similar to that seen with serious abdominal disorders, including cancer. You take the pan from her, and the other intern brings her a clean pan and begins the assessment process.

A sample of the coffee-ground emesis is sent immediately to the lab. Dr. Metz attends to Ms. Harriman. You are with him during assessment, as she tells him, “I’ve had jaundice, fatigue, weight loss, nausea and vomiting, and back pain. Last time I had a CT scan, but I really think I need an endoscopic ultrasound. Do you think I should have a pancreatic biopsy? Because I’m thinking that’s the only thing that’s going to tell us for sure if I have pancreatic cancer.”

Dr. Metz says patiently, “Well, first, we need to pinpoint the location and nature of your abdominal pain. How’s your nausea at the moment? Are you comfortable with me palpating your abdomen?”

She nods and lies back, looking at the ceiling. She seems a little relieved.

As the sheet is pulled back and the paper gown lifted, you are surprised to see that Ms. Harriman appears to have had at least one other abdominal procedure.

Just then, the lab technician motions you out into the hallway.

1. What disorder do some of Ms. Harriman’s behaviors most likely indicate? Identify clues that

support your temporary diagnosis; include your speculation of what’s going on with those

coffee grounds.

2. Why might it be difficult to determine the psychological basis for Ms. Harriman’s

somatization?

3. In light of the evidence shown here, what kind of self-assessment may be very important if you

will continue to work with Ms. Harriman?