The background for this problem comes from Moby Dick; or, The Whale by HermanMelville. If you are interested, it is Chapter 16:
http://www.americanliterature.com/Melville/MobyDickorTheWhale/17.html
The ship owners never know beforehand how successful a voyagewill be. Let%u2019s suppose that the barrels of oil from a voyagecan range evenly from 1,200 barrels to 5,000 barrels, with revenueof $15 per barrel. The fixed cost of fitting out a ship and makingthe voyage is $5,000, and the variable cost is $5 per barrel. If Imade my computations correctly, the expected profit is $26,000,though it ranges from $7,000 to $45,000.
Included in the fixed cost of $5,000 is the cost of feeding thecrew for the voyage. The $5,000 does not include the crewmember payabove the cost of food that a crewmember gets for participating inthe voyage.
Herman Melville writes as though the participants in the voyageall take a share of the profits. If they provide a lot of thecapital, like providing funds to outfit the ship, they get a largeshare of the profits. If they sign on as crewmembers, they getsmaller shares of the profit. Using my numbers from above, ifIshmael signs on for a 1/50th share of the profits, his expectedshare of the voyage is $520, though it ranges from $140 to $900.This substitutes for the voyage pay that Ishmael might get inaddition to the cost of his food.
Required:
1. Consider the cost-volume-profit structure proposed above.
a. What is the profit remaining for other participants afterIshmael gets his 1/50th share, supposing that they retrieve 1,200barrels?
b. What is the profit remaining for other participants afterIshmael gets his 1/50th share, supposing that they retrieve 5,000barrels?
c. What is the expected profit remaining for other participantsafter Ishmael gets his 1/50th?
2. We can imagine that Ishmael might request a fixed wage ratherthan a share of profits. For example Ishmael might try to bargainfor fixed wages of $520 and forego the share of profits. This wouldraise the fixed cost of the voyage to $5,520, and the variable costper barrel would be unchanged.
a. What is the profit remaining for other participants withIshmael getting a fixed $520 for the voyage supposing that theyretrieve 1,200 barrels?
b. What is the profit remaining for other participants withIshmael getting a fixed $520 for the voyage supposing that theyretrieve 5,000 barrels?
c. What about at 3,000 barrels?
d. What would be the expected profits remaining to otherparticipants if Ishmael were to make this bargain to take the fixed$520?
3. What seems to be the captain%u2019s and ship%u2019soutfitter%u2019s motivation for making all the participants,including the crewmembers, take a share of profits rather thangiving a fixed wage? Is the motivation to build an incentive towork hard with a pay-for-outcome regime? Is the motivationrisk-sharing?
The background for this problem comes from Moby Dick; or, The Whale by HermanMelville. If you are interested, it is Chapter 16:
http://www.americanliterature.com/Melville/MobyDickorTheWhale/17.html
The ship owners never know beforehand how successful a voyagewill be. Let%u2019s suppose that the barrels of oil from a voyagecan range evenly from 1,200 barrels to 5,000 barrels, with revenueof $15 per barrel. The fixed cost of fitting out a ship and makingthe voyage is $5,000, and the variable cost is $5 per barrel. If Imade my computations correctly, the expected profit is $26,000,though it ranges from $7,000 to $45,000.
Included in the fixed cost of $5,000 is the cost of feeding thecrew for the voyage. The $5,000 does not include the crewmember payabove the cost of food that a crewmember gets for participating inthe voyage.
Herman Melville writes as though the participants in the voyageall take a share of the profits. If they provide a lot of thecapital, like providing funds to outfit the ship, they get a largeshare of the profits. If they sign on as crewmembers, they getsmaller shares of the profit. Using my numbers from above, ifIshmael signs on for a 1/50th share of the profits, his expectedshare of the voyage is $520, though it ranges from $140 to $900.This substitutes for the voyage pay that Ishmael might get inaddition to the cost of his food.
Required:
1. Consider the cost-volume-profit structure proposed above.
a. What is the profit remaining for other participants afterIshmael gets his 1/50th share, supposing that they retrieve 1,200barrels?
b. What is the profit remaining for other participants afterIshmael gets his 1/50th share, supposing that they retrieve 5,000barrels?
c. What is the expected profit remaining for other participantsafter Ishmael gets his 1/50th?
2. We can imagine that Ishmael might request a fixed wage ratherthan a share of profits. For example Ishmael might try to bargainfor fixed wages of $520 and forego the share of profits. This wouldraise the fixed cost of the voyage to $5,520, and the variable costper barrel would be unchanged.
a. What is the profit remaining for other participants withIshmael getting a fixed $520 for the voyage supposing that theyretrieve 1,200 barrels?
b. What is the profit remaining for other participants withIshmael getting a fixed $520 for the voyage supposing that theyretrieve 5,000 barrels?
c. What about at 3,000 barrels?
d. What would be the expected profits remaining to otherparticipants if Ishmael were to make this bargain to take the fixed$520?
3. What seems to be the captain%u2019s and ship%u2019soutfitter%u2019s motivation for making all the participants,including the crewmembers, take a share of profits rather thangiving a fixed wage? Is the motivation to build an incentive towork hard with a pay-for-outcome regime? Is the motivationrisk-sharing?
