Stella Ann Freeman

Stella Ann Freeman
Name
Course
Instructor
Date

MBA 540 Mid-term Exam
1. (10 pts.) Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision?
Opportunity cost relates to the cost of foregoing an alternative. The opportunity cost in the case for buying the new car is using the money to purchase another commodity or paying for a home, vacation. At the same time, Stella will give up the opportunity to increase her savings in the future. As such, she remains to have less money to invest, since it goes into consumption (buying the new vehicle). Stella also needs to take into account the cost implication of the new vehicle through maintenance, and this is potentially a loss in investment, if the car is for personal use only. Stella has to decide whether to give up the car, or buy and use it partially for business or collateral, and when there is utility maximization then Stella will have satisfied her needs.
2. (10 pts.) Referring to the table below, hiring a driver costs $10. Each machine costs $100. Which method should he use and why?


DriversDriverMachinesMachine Totalcosts (@10)costs (@100)Method 1202001010001200Method 2505002200700Method 31001000001000Method 4101001212001300
Even though, method 2 results to the lowest cost at $ 700, the most optimal option is method 4 as he purchases 12 machines to be driven by 10 drivers, and the choice is the most efficient.
3. (10 pts.) Enron will be an example of a dysfunctional company for many years to come. It was clearly a company riddled with fraud and excess and its conduct drove it into bankruptcy. The text argues that individual behavior was not at the core of Enron’s problems. What were the problems with this corporation from an organizational architecture point of view?
The decision making process of Enron put the corporation at risk given that, there were no adequate checks on decisions made by some of the employees. As such, even the low level workers made questionable decisions as they lacked adequate knowledge, and the management did not seem to take note (Griff, 2014). At the same time, the company’s compensation system rewarded high performers generously. The incentives were merely based on performance, while disregarding employee behavior, meaning that judging the performance of the workforce was inadequate to create a true picture about their ethical practice. But there were no checks and balances to ensure that the high performers did not engage in unethical practice in order to get higher bonus payments.
4. (10 pts.) For many corporations such as utility companies, a major portion of the cost of production is fixed in the short run. Should these very large fixed costs be ignored when the executives are making output and pricing decisions? Why? 
When focusing on pricing options and output, executives typically ignore the fixed costs in the short run, while focusing more on the contribution margin (Maher, Stickney & Weil, 2012). The fixed costs of production are not dependent on the level of production, and are incurred when a company has business operat...