Marginal analysis refers to the assessment of extra-economic repayment of a project, which is compared to the extra costs of the said project. Most decisions made in a company to maximize profits have been reached using the marginal analysis concept (Shrivastava, Mitroff, Miller, & Miglani, 1988). In microeconomics, the analysis of how complicated systems are affected by the variables involved has also been achieved by the use of marginal analysis. Economic Value is the measure of economic performance on the remaining wealth, which is calculated by obtaining the difference between economic profits (the operating profits after tax) and the cost of capital of the company.
EVA = Profit after taxes – Capital x cost of capital.
In the Bally Gears Inc case, the following would apply
Marginal added benefits being the extra benefits that will be realized from the replacement of the existing robots with new ones shall be calculated by getting the difference between the benefits accrued from the existing robots and benefits that shall accrue from the new ones.
Benefits from new robots – Benefits from the existing robots = (560,000-400,000) =$160, 000
Marginal Added costs in this case is the cost involved in the acquisition of the new robots taking into account the salvage value of the existing old robotics. In this case, the initial investment of $220,000 will be reduced by $70,000 being the salvage value of the old robotics.
= (Initial Capital outlay-salvage value of the old robotics) = (220,000-70,000) =$150,000.
The Net Marginal benefit is the difference between incremental costs and incremental benefits.
Marginal costs-Net benefits =160,000-150,000 =$10,000
the new robotics are economical as compared to the existing old robotics. In my opinion, the manager should advise the company to replace the existing robotics with the new proposed robots. This will increase the shareholders’ wealth, as the net benefit accrued would be positive. The shareholders would be more comfortable with the new robotics than the old robotics.
The manager should consider more factors apart from the monetary benefits. Such factors as the timing of cash flows, future cash flows, involved risks, and the time value of money should be considered
Economic Value Added (EVA)
EVA = Net profit after Tax – Capital outlay x cost of capital
Net profit after tax = $345,000 – (345,000 x 25%) = $258,750
EVA = $258,750 – (1,500,000 x 13.6%) = $258,750 – 204,000 = $54,750
In this case, the receptionist would be abusing the lunch break and there would be a need to resolve this. The company would need to evaluate her pay and see whether her compensation is worth wasting the 20mins. If not, the company should install a clock, which she will be pressing each time she returns, and pay her according to the number of hours worked.
This results in a lot of capital being tied up, which would make funds unavailable for other ventures, which would be financially beneficial to the company. The managers should then be rewarded based on their cost estimation ability and be taught how to make reasonable estimates (Granot, 1998).
If the firm is up for grabs, a problem might arise whereby the CEO might sell the firm at a loss since he will benefit from the merger. The best thing to do is to advertise and put the firm publicly on sale and the highest bidder takes it all.
In general, this will result in inefficiency in the company since part-time workers may not be as productive as full time employees (Williams, Smith, & Young, 1998). The company would then end up producing low-quality products, which would in turn affect its turnover. This problem can be cut by pegging the manager’s compensation on the share prices or giving him or her targets and compensation. This would make him keep the quality workforce.
References
Granot, H. (1998). The human factor in industrial disaster. Disaster Prevention and Management, 7(2), 92‑102.
Shrivastava, P., Mitroff, I., Miller, D., & Miglani, A (1988). Understanding industrial crises. Journal of Management Studies, 25(4), 283-303.
Williams, A., Smith, M., & Young, P. (1998). Risk Management and Insurance. London: Irwin McGraw Hill.