Real World Enterprises (RWE) provides a variety of \"backroom\" business service
ID: 326214 • Letter: R
Question
Real World Enterprises (RWE) provides a variety of "backroom" business services to other companies. It operates eight different facilities that employ large numbers of workers undertaking clerical tasks. The firm has become aware that a significant number of its workers suffer from hand and wrist injuries associated with repetitive motion on the job. These injuries result in productivity losses, increased health care costs (RWE provides generous health benefits to its employees), and reduced employee morale. RWE has undertaken a study of the extent of the problem. The study finds that the firm would incur a cost of about $150,000 per facility to create a health and safety program. The study also notes that the problem is much greater at some facilities (because of differing clerical tasks) than at others. The following table estimates the relation between total benefits to RWE and the number of facilities participating in the safety program: Number of facilities in program Total benefits to RWE (sm) o.500 o.975 1.375 1.60o 1.700 1800 1.850 1.875 1 2 4 At how many facilities (if any) should RWE offer the health and safety program? What is the net gain for the company, given this investment in the program? a.Explanation / Answer
a) Ideally, RWE should provide benefits at all facilities.
Total cost incurred = 150,000*8 = 1.2 MN
Total benefit to RWE = 1.875
Net gain = 0.675 MN
Please note the answer is ->Maximum ROI is achieved if 4 facilities participate, the Total cost incurred for program = 0.6 MN, Benefits = 1.6 MN, Net gain = 1 MN
b) In this case, optimal RWE facilities would be 6. An additional benefit of 75,000 per facility is there.
Suppose we now have 5 facilities then the total increase of benefit = (1.7-1.6) + 0.075 = 0.175 K which is greater than the cost of implementing the program. Further, when we increase facilities to 6 from 5, the increase of benefit is 0.175 K. However, when we move from 6 to 7 facilities, the total benefit increase = (1.85-1.8) + 0.075 = 0.125K which is less than the cost of the program. Hence ideal facilities = 6.
c) Social welfare impact = 0.075 * 8 = 0.6 MN
Total benefit = 1.875 + 0.6 MN = 2.475 MN
d) OSHA can provide for the cost of implementing the program (incentive) by RWE. This incentive can be equal to the Cost of program - Increased benefits. For example - Suppose RWE wishes to implement program in 5 facilities, however increase of benefit to RWE = 1.7 - 1.6 = 0.100 MN. The cost of implementing program = 0.150 MN. Hence, OSHA can provide an incentive of 0.15 - 0.10 OR 50 K for RWE if it plans to implement programs in an additional facility.
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