MBA has total fixed costs of $2,160 per day. The firm manufactures MBA advice kits. The kits have a short-run average variable cost of $48 and are sold for $66 each. Assuming constant per unit costs in the relevant range: (i) What is the breakeven level of daily output for the firm (= BE)? (ii) What is the degree of operating leverage when daily output is Q = 170? 2. Bob and Bill are college students. They are trying to decide what to do over the next summer. Bob’s father has suggested that they both come and work at his plastics manufacturing company where each will earn $3,600 over the summer.Bill’s father, who runs the local farmer’s market, suggests that they go to a local resort area and sell fresh fruit and vegetables to tourists. Their markup on the produce would be twenty-five percent, so each $1. 00 of revenue would involve a variable cost of $0. 80. In addition to purchasing the produce, they would have to rent a location. The cost to rent a small roadside stand for the summer is $2,400. (i) How many dollars worth of produce will they have to sell in order to break even in an accounting sense? (ii) How many dollars worth of produce will they have to sell in order to break even in an economic sense? . In 1988, Du Pont’s fiber division introduced a new incentive program for its 20,000 employees, including both management and lower-level employees. The novelty of the program was that a portion of the employees’ annual pay (approximately 5%) would be placed into a pool. If the business exceeded its profit target for the year, then each employee would receive a multiple of the money placed in the pool as a bonus (e. g. , if an employee’s contribution to the pool was $100, then he would receive, say, 1. 3 x $100).If the business profits were below the target for the year, then the employees would lose the money placed in the pool. The incentive program was adopted initially for 3 years. In 1990, due to a decrease in demand and an unexpected increase in input prices, it was clear that business profits would be substantially below the target set for that year, and therefore employees would lose the money in the pool, which amounted to a significant financial loss for them. Given the substantial employee discontent that ensued, Du Pont decided to cancel the incentive program in October 1990, calling it a “big mistake”. ) Use Principles I and II to analyze Du Pont’s incentive scheme. b) Propose an alternative incentive program (with similar features) that you think might work better than Du Pont’s original plan. a. The current incentive program assumes that all employees of the organization regardless of professional level hold the same risk aversion. This would be a bad assumption considering money is the deciding factor and those in higher level positions usually have more of it than lower level positions, and thus would be more willing to risk it.While the idea behind this incentive program is good because it ties in performance but it doesn’t break it down by department or work center and based on page 40 of the module “overall profits of the firm do not depend strongly on middle level managers actions and it should not be given too much weight according to principle I. ” b. An incentive program based on relative performance, such as how the manager is performing compared to other managers is more consistent with Principle II. Rewards based off selection as worker of the month are also considered to be Relative Performance incentives. 4. You work for a compensation-consulting firm.You are designing a compensation scheme for the CEO of a major corporation. The board has asked you to choose the parameters a, b, and c, in the following incentive contract: I = a + b [(company stock return) – c (industry stock return)] Discuss the key factors that will influence your recommendation for each of these three parameters. 5. Level 3 Communications is a diversified communications and information services company, with over $1. 5 billion in revenues in 2002. In order to recruit and reward talented senior employees, it implemented its Outperform Stock Option (OSO) program in April 1998.Level 3 rewards its senior executives with OSO options, whose value is based on Level 3’s stock market performance relative to the performance of the S;amp;P index. The option only has value if Level 3’s stock outperforms the S&P 500, but it has no immediate value if its stock does worse than the S&P 500. a) Use the principles of incentive contract design to analyze the main advantages of the OSO program. b) Only a few firms have adopted similar programs. Discuss why a firm might be reluctant to use OSO options.