A tobacco company is interested in hiring a salesperson to promote smoking cigar

Question

A tobacco company is interested in hiring a salesperson to promote smoking cigarattes in nightclubs. The position pays a flat salary of $50,000, regardless of sales levels. The firm has two applicants, predictable Patty and Risky Ricky. Predictable Patty can produce with 100% certainty $100,000 a year in sales. Risky Ricky, on the other hand, can produce $300,000 with a probability of 50%. But fi he turns out to spend his time drinking and dancing in the nightclubs instead of making sales, he could actually cost the firm $100,000 per year. *may want to use Excel spreadsheet to help solve this problem*

A. During their first year on the job, what are the expected sales of Patty and Ricky?

B. Now assume both workers are currently 25, and they will work until retirement age of 65. The firm has the option to fire its new employee after one year based on sales, but can only hire one employee. Assume that it takes only one year to discover whether Ricky is productive or not, and that he will remain that way for his lifetime. The firm’s discount rate for future profits is fixed at 10% over the life of both workers. Which employee should it hire?

Explanation / Answer

(a)

The total revenue generated by both of them are equal considering the risks associated with RR involved. But the firm should hire Predictable Patty as the involvement is risk is least.

Expected sales= 1*100000+0.5*300000=$250,0000

(b)

Hiring RR would be productive, if after one year found unproductive the present value of costs to the company will be 90909, However if he comes out to be productive the future value of benefits until retirement (10909091) are way more than the PP (3636364).

Salary Sales Revenue to the Company Predictable Patty Risky Ricky Predictable Patty Risky Ricky Predictable Patty Risky Ricky Case 1 PP and RR Drinking and Dancing 50000 50000 100000 300000 50000 250000 Case 2 PP and RR 50000 50000 100000 -100000 50000 -150000 100000 100000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.