) Differentinte between fixed costs and sunk costs. Explain the importance of (5
ID: 1115957 • Letter: #
Question
) Differentinte between fixed costs and sunk costs. Explain the importance of (5 marks these conceps in managertial decision mali n ) The manager of your company's pension fund is compensated based entirely on fund performance; he carned over 1.2 million GHS last year. As a result, the fund is contemplating a proposal to cap the compensation for fund managers at 100,000 GHS. Do you agree with this proposal? Why or why no? marks) ) The owner of Nuvel Inc, a small toilet roll manufacturing company in Ghana producing in a very competitive market read an article in a trade publication stating that the own-price elasticity of demand for toilet rolls in Ghana is -0.4. Because of this highly inelastic demand in Ghana, she is thinking about raising prices to increase revenues and profits. Do you recommend this strategy based on the information she has obtained? Explain.Explanation / Answer
If his compensation is based entirely on fund performance, then the manager has a very strong incentive to make sure that the fund performs well. Capping his compensation to $100,000 or any amount means that he will have less of an incentive to manage the fund any more than it takes to reach this cap and to ensure that he is able to keep his job (that is, he is not replaced by another manager who is willing and able to manage the fund better at this level of compensation). Although the funds will probably be managed adequately (so he can keep his job), the fund is highly unlikely to perform as well as it would have without the cap.
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