Answer to Question #180148 in Economics of Enterprise for sharjeel

Question

The shareholder of Al-Karam wants to maximize his profits by selling his goods in the larger quantities. In order to achieve his target (s) he hired a manager to look after his business. However, the manager instead of maximizing business profits started maximizing his own interest by selling the designs in black to the competitor’s designers.

a.      Analyze the above situation and explain the possible problem that might occur for Al-Karam.

If the wealth of the stockholder is decreasing ever since he hired the new manager, using EVA rule of thumb explain what would be the value of EVA and what is its economic interpretation

Answer 1

As the manager tries to maximize his own interest by selling the design in black to the competitor designers, Al –Karam will have a loss in sales as all the profits are earned by the manager. The profit is not maximized. The problem that might occur is that AL-karam’s profit will even decrease as the firm produce more than profit-maximizing quantity.

The value of EVA (economic value added) would be negative. This means that since the new manager was hired, the company is not generating value from the funds invested into the business.