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25 Cards in this Set
- Front
- Back
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Contribution Margin
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Revenue - variable costs
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Total operating income (profit)
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Contribution margin - fixed costs = revenue - total costs = (subscribers * contribution margin) - previous fixed costs
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Breakeven Units
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Fixed costs / Contribution margin
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Adverse Selection
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an individual with private information extends an offer to a trading partner that affects the welfare of the trading partner
Types: incompetence; uninformed decisions, providing misleading/incomplete info Ex. health/ life insurance: those who are sick are more likely to buy insurance |
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Moral Hazard
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willful misconduct (action or inaction) that redistributes wealth from principal to agent
Types- perk consumption, shirking, dishonesty, fraud Ex. auto insurance: if people have no responsibility for loss, they may drive carelessly |
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Solutions to reduce agency problems
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Selection, incentive contracts, monitoring
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Agency costs
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screening, bonding, restriction/sanctioning, monitoring, residual costs
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Screening
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obtaining pre-contract info
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Bonding costs
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designing incentives that "bond" agent's goals to the principal's
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Restriction/ sanctioning
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design and effects of contracts with punitive actions
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Monitoring
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Compliance with controls, contracts
Weight probability of observing undesirable behavior |
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Residual costs
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the conflict that remains after feasible solutions are in place
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Types of Knowledge
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General: inexpensive to transfer
Quantities/ prices of available goods Specific: expensive to transfer Idiosyncratic- particular circumstnaces of time/place Scientific- general rules of cause/effect Assembled- personal experience over time |
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Decision right
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decide and take action with a resource
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Alienable ownership rights
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sell a resource and capture profit
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Rule #1
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allocate decision rights so they're closer to those with specific knowledge of how best to use a resource
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Rule #2
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Control system:
a. performance measure b. reward & punishment |
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Economies of scale
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produce more, unit cost decreases
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Economies of scope
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average total cost of production decreases as number of different goods produced increases
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What kinds of organizations use decentralized (flat) structures
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startups, complex products/services, greater goal incongruence, high levels of at-risk pay (stock options)
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What kinds of orgs use centralized (hierarchical) structures?
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government, hospitals, necessary/invasive services in which creativity isn't good, detailed job descriptions
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Steps involved in decision-making
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1. initiation (decision management)
2. ratification- approval by BoD 3. Implementation (decision management) 4. monitoring |
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Cost-Volume-Profit (CVP) Analysis
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model for evaluating decision alternatives
incorporates relationships between price, volume, and costs includes simplifying assumptions about those relationships |
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Residual income
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Operating income - cost of capital
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Cost of capital
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assets * rate of return
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