The CEO of a grocery food chain in California would like to know if putting a 10

Question

The CEO of a grocery food chain in California would like to know if putting a 10% sale on organic products boosts their sales. He/She collected data from all store locations last year. Some store managers put a 10% discount on organic products for the entire year and some did not. The difference in organic food sales between the stores that implemented the discount and those that did not was about 20%.

(a) The CEO claims that the 20% difference between the stores that implemented the 10% discount and those that did not is due to the 10% discount. Can you explain to him/her why this may or may not be the case?

(b) Explain why 20% increase in sales might overestimate the effect of the 10% discount?

(c) The CEO is convinced by your argument, but is not sure how to proceed to answer his/her question? Can you propose a strategy to answer it?

Explanation / Answer

a) Increase in sales is not only the result of discount. It may be the presence of a wise and intellectual sales maximizing rathre than profit maximizing manager that has increased the sales. A manager's motive is driven by his staff and its performance, which may even surpass the effect of a discount.

b) As mentioned, the rise in sales might have occured due to factors antirely different. A 20% increase in sales might thus, overestimate the effect of the 10% discount.

c) Manager's salaries over all deparments must be checked. There may be the managers, earning a fixed salary of with no share in profit or revenue. Hence he may have ample opportunities to shirk since his performance is not based on the profits earned by the store under his managerial supervision.

When this behavioral change is observed by the owner, she changes the compensation scheme. The manager’s performance may now be based on the profits earned by the store. Thus he is likely to perform better so that the store can perform better and earn more profits

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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