A tobacco company is interested in hiring a salesperson to promote smoking cigar
ID: 2383379 • Letter: A
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
. A. Assume, that each year the chances that a worker will leave the firm, given he/she has not left to date, are 20% (i.e. the firms expected turnover rate for these sales positions is 20% per year). Which employee should it hire?
B. Use your spreadsheet program to increase the firms discount rate higher and higher above 10%. What happens to its expected present value of profits for each worker? Do the same for the turnover rate. What happens in each case to the firms decision regarding which of the two workers to hire? Why?
Explanation / Answer
A)
Which employee to hire:
Particulars
Patty
Risky
Expected sales
100,000
300,000
Probability
100%
50%
Sales
100,000
150,000
Less
Cost of salary
50,000
100,000
Benefit to company
50,000
50,000
After analysing the cost and benefits; the company shall choose Risky for the job position. Because, his spending time in night clubs is more where there is more scope for its business.
Thus, the probability of the sales may increase which leads to profit increase.
Therefore, company shall choose Risky for the position.
Particulars
Patty
Risky
Expected sales
100,000
300,000
Probability
100%
50%
Sales
100,000
150,000
Less
Cost of salary
50,000
100,000
Benefit to company
50,000
50,000
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