2023 Lecture One - Fundamentals of Managerial Economics PDF

Managerial Economics Lecture 1: The Fundamentals of Managerial/Business Economics McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.  What are you in for? ▪ What kind of course is this? – we apply economic thinking to ev...

Managerial Economics Lecture 1: The Fundamentals of Managerial/Business Economics McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.  What are you in for? ▪ What kind of course is this? – we apply economic thinking to everyday problems of firms ▪ Pre-requisite: principles of economics or similar, some basic math is also required ▪ What is expected of you in this course? – Class participation / attendance is monitored, because not everything is in the course textbook! – Do well in your quizzes – Complete individual homework assignments on time! – Do well in the final exam! 1-2 Question: ▪ There are three streams of programmes offered by University of Cape Coast. These are Regular, Distance and Sandwich. Why did you chose Sandwich over the other two programmes? 1-3  Learning Objectives ▪ What is managerial economics? ▪ Ten Principles of Economics ▪ The Business Environment ▪ The Economics of Effective Management 1-4 What is Economics? 1-5  What is Economics? ▪ Decisions and Choices ✓ Scarcity of resources o Resources are simply anything used to produce a good or service or, to accomplish a goal. ▪ Scarcity means that society has limited resources and thus, cannot produce all the goods and services people wish to have. ▪ Decisions are relevant because scarcity implies that by making one choice, you give up or sacrifice another. 1-6  What is Economics? ▪ For instance: A food processing company that spends more resources on advertisement has fewer resources left to invest in R&D. ▪ This implies that the management of society’s resources is imperative because resources are scarce. – just as a household cannot give every member everything he/she wants, a society cannot give every individual the highest standard of living. ▪ Thus, Economics is a study of how society manages its scarce resources. 1-7 Who is a Manager? 1-8  Who is a Manager? ▪ Is a person who directs resources to achieve a stated goal. It includes individuals who: ✓ Direct the efforts of others, including those who delegate tasks within an organisation such as a firm, family and so on. ✓ Purchase inputs to be used to produce goods and services such as output of a firm, food for the needy etc. ✓ Are in charge of making other decisions, such as product price and quality. 1-9 What is Managerial Economics? 1-10  What is Managerial Economics ▪ It is the study of how to direct scarce resources in the way that most efficiently achieves an optimal managerial decision. Example: You are a manager of a company that produces Delay Mackerel. To succeed as a manager you should make some decisions on; ✓ Whether you should purchase tins from other manufacturers or produce within the firm ✓ The quantity of Delay mackerel you should produce and at what price you should sell. ✓ The number of workers you should hire and how you should compensate them? ✓ How will the actions of rival Mackerel firms affect your decisions? 1-11 The Principles of Economics 1-12  The Ten Principles Of Economics Decision making involves trade-offs The cost of something is what you give up to get it Rational people and businesses think at the margin People and businesses respond to incentives Trade can make everyone better off Markets are usually a good way to organize economic activity Government can sometimes improve market outcomes An economy’s standard of living depends on its ability to produce goods and services Prices rises when governments prints too much money The society faces a short-run trade-off between inflation and unemployment 1-13  The Ten Principles Of Economics Summary of the ten principles How people and businesses make decisions 1. People and businesses face trade-offs. 2. The cost of something is what you give up to get it. 3. Rational people and businesses think at the margin. 4. People and businesses respond to incentives. How people and businesses interact 5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Government can sometimes improve market outcomes. How the economy as a whole works 8. A country’s standard of living depends on its ability to produce goods and services. 9. Prices rise when the government prints too much money. 10. Society faces a short-run trade-off between inflation and unemployment. 1-14  The Business Environment What is Business – The Transformation Process ▪ If business is about decision making, what is business? ▪ In its simplest terms, business activity involves taking a series of inputs and producing an output (physical good or service) ▪ The business might provide these goods and service to someone who actually consumes the good or service (final consumer) or to another business who may either act as an intermediary or who will do something to the goods before selling them. ▪ Business activity where the business sells goods and services to a final consumer is referred to as B2C business. ▪ Business activity where the business sells a good to another business is referred to as B2B business. 1-15  The Business Environment What is Business – The Transformation Process ▪ A business activity where consumers interact with consumers by social networking sites or specialist websites (eBay, amazon, Tonaton and so on), which facilitates this type of trade is referred to as C2C business. Factors of Production ▪ There is a common feature, which characterizes business activity. This feature is referred to as Transformation Process. ▪ Transformation process is the process in which businesses take factor inputs and process them to produce outputs, which are then sold. ▪ Any business has to utilise inputs, referred to as Factors of Production and does something with them to produce an output- a semi-finished product or commodity or a finished product. 1-16  The Business Environment What is Business – The Transformation Process Factors of Production ▪ Factors of production is a classification of inputs used in business activity, which includes land, labour, capital and enterprise. – Land refers to all the natural resources of the earth, which can be used in production – Labour refers to all the human efforts, mental and physical, which is used in production. – Capital refers to any item used in production, which is not used for its own sake, but for what it contributes to production. – Enterprise refers to the act of taking risks in the organisation of factors of production to generate business activity. 1-17  The Business Environment What is Business – The Transformation Process The Transformation Process ▪ It is worth noting, how these factors are brought together, in what proportions and how they work together in the transformation process, could be very different even in the same type of business operating in the same industry. ▪ One of the key elements of the transformation process is adding value and this could be at any stage in this process. – Added value is what a business does to inputs to convert them to outputs which customers (businesses or final consumers) are prepared to pay for. Adding value could be in the form of a piece of technology that makes a consumer’s life much easier in some way or does the job the product is designed for effectively. 1-18 The PESTLE Framework 1-19  The Business Environment The PESTLE Framework ▪ The business can have some control over the inputs it buys and how it combines those inputs to produce its outputs. ▪ However, there are a number of external factors over which it has very little control, but which it has to respond and react to. ▪ In order for a business to understand and analyse these external factors, a framework is used which summarises a number of broad, sometimes highly related and interacting areas, which business has to work within. ▪ The framework is referred to as the PESTLE Framework. – Political – Economic – Social PESTLE – Technological – Legal – Environment. 1-20  The Business Environment The PESTLE Framework Political ▪ Politics refers to power- who has power, who makes decision and how it affects individuals in business. ▪ Power can be wielded, by local governments, national government and supra-national government such as the AU, ECOWAS and so on. ▪ Changes to laws, directions in policy or regulations can all affect businesses in different ways. ▪ Laws on employment, employee rights and responsibilities, health and safety, taxation, planning, trade and business governance, all affect business and invariably raise the cost of doing business by either involving the business in additional times, form filling or procedures. 1-21  The Business Environment The PESTLE Framework Political ▪ In some cases laws or regulations may be passed with the aid of helping a business by giving grants or special dispensation to operate. ▪ For example, there may be a relaxation of planning regulations, which mean a business can establish new premises more quickly, but in return the business has to remain at the premises for a certain period of time or employ a certain number of people. 1-22  The Business Environment The PESTLE Framework Economic ▪ Businesses have to operate within a particular economic environment. ▪ This relate to the extent of economic activity in different ‘economies’ which could include a very local economy, a regional economy, a national or global economy. ▪ Economic activity refers to the amount of buying and selling that takes place. ▪ The rate at which buying and selling takes place varies at different time periods for different reasons. ▪ Businesses are affected by these fluctuations in the economic activity. 1-23  The Business Environment The PESTLE Framework Economic ▪ In many cases, these fluctuations might be triggered by some crisis such as debt crisis, or financial crisis, or by changes in interest rate, but the effect are magnified by the changes in confidence levels in individuals, firms and governments. ▪ It is also possible to classify these effects as microeconomic or macroeconomic. ▪ The microeconomic environment refers to factors and issues that affect an individual firm operating in a particular market. ▪ Changes in economic activity can affect firms in both positive and negative ways. 1-24  The Business Environment The PESTLE Framework Economic ▪ For example, in times of economic slowdown, businesses such as second- hand shops or low price discount stores may actually find their businesses increases. ▪ In times of weak economic growth, retail businesses which sell high earned product such as electronic goods or fashion items may find that they are very badly hit and sales may fall dramatically. ▪ The macroeconomic environment on the other hand, refers to national or global economy within which the business operates. ▪ The things which can affect businesses from macroeconomic changes include variations in exchange rates, interest rates, policies on taxation, planning, competition and so on. 1-25  The Business Environment The PESTLE Framework Social ▪ Businesses are affected by various trends, fashions, moods and changes in society. ▪ There are broad social changes that have an impact on businesses such as the changing structure of the population. ▪ For some countries, aging population provides them with opportunities to develop products and services which are targeted at the needs of the growing number of people who are over 60 – For instance, manufacturers in these economies tend to develop vehicles which cater for the needs of older drivers through the promotion of more intuitive technologies such as parallel parking, sensors which can help the car to effectively ‘see round corners’ and so on. 1-26  The Business Environment The PESTLE Framework Social ▪ Other social changes such as the growth in the use of social networking sites, viral messages and the Internet have opened up opportunities but also present threats. ▪ Facebook and Twitter provide the chance for businesses to showcase themselves and have their brand and message spread quickly to large numbers of people at low cost. ▪ The flip side of this is that the degree of control a business has over messaging and the reporting of the business is very weak. – Employees can, sometimes innocently, compromise the business and damage the brand or reputation simply through an ill-judged piece of behaviour which is subsequently broadcast to millions on YouTube or Facebook. 1-27  The Business Environment The PESTLE Framework Technological ▪ Technology is the application or use of knowledge in some way which enables individuals or businesses to have greater control over their environment. ▪ Businesses constantly think of ways in which they can employ knowledge in this way because it can help to reduce costs, improve technical and productive efficiency. ▪ Technology can also help give a firm competitive advantage. ▪ It helps to provide some answers to the most pressing problems that humans face including how to treat killer diseases, tackle global poverty, save animals and plants from extinction and so on. 1-28  The Business Environment The PESTLE Framework Technological Quick Quiz…. Outline two examples where you think technology has improved our lives and two examples where you think technology has not led to an improvement in human welfare. 1-29  The Business Environment The PESTLE Framework Legal ▪ Laws and regulations can be national or supranational. ▪ Legal framework covers all aspects of society and businesses have to abide by this laws. ▪ A strong legal system which is respected is fundamental to the principle of good governance, which intends helps provide confidence in the way in which business operates and so promotes trade. ▪ For example, customers want to know that if they buy a gallon of fuel from a petrol station they do actually get a gallon of fuel dispensed from the pump. ▪ Investors need to know that the information on which they base their decisions is accurate and truthful as possible. 1-30  The Business Environment The PESTLE Framework Legal ▪ Laws and regulations govern the way in – which financial accounts are reported, – which labour markets work, – which health and safety measures businesses need to put in place – which businesses can describe and advertise products – which information consumers must be given – which minimum standards must be met and so on. 1-31  The Business Environment The PESTLE Framework Legal ▪ Whiles a strong legal and regulatory framework provides confidence, it also comes at a costs. – For example, businesses have to pay to implement legal and regulatory requirements, which raises their cost of production and thus, increasing prices of their products. 1-32  The Business Environment The PESTLE Framework Environment ▪ It is now rare for any business to operate without some recognition of the impact of its operations on the environment. ▪ This awareness maybe because of a conscious policy decision to manage its operations, to take account of that impact. ▪ There is a concern on how we use resources and manage the results of their use in terms of the waste products generated and the impact on economic systems and land use. ▪ There are plenty of studies to suggest that carbon emissions, largely produced by human activity, have been a direct cause of a gradual rise in global temperature. 1-33  The Business Environment The PESTLE Framework Environment ▪ Major efforts have been made to get global agreement on reducing carbon emissions and finding more environmentally friendly ways of producing goods, services and energy. ▪ Due to this, many businesses are thinking about recycling and thus, they have put in place recycling policies and facilities. ▪ However, as managerial economists, we need to be thinking about the costs and benefits of recycling and therefore, whether it make economic sense. ▪ Not all recycling is “good” if for example, the amount of resources necessary to recycle metal cans into other products were greater than the cost from producing the cans from scratch, would it be a sensible business decision? 1-34 The Economics of Effective management Who can be described as an Effective Manager? 1-35 The Economics of Effective management - An effective manager must - Identify goals and constraints - Recognize the importance and nature of profits - Understand incentives - Understand markets - Recognize the time value of money - Use marginal analysis 1-36 Identifying Goals and Constraints 1-37  Identify Goals and Constraints ▪ The first step in making sound decisions is to have well- defined goals because achieving different goals entails varying decisions. For instance: If you want to maximize your grade in this course rather than maximize your grade point average, then your study habit will differ accordingly. ▪ But you will be faced with constraints that will influence your ability to achieve a goal. ✓ 24-hour day influences your ability to earn an A in this course. ▪ In firms, constraints make it difficult for managers to achieve goals- maximizing profits or increasing market shares. 1-38 Constraints on the operations of the firm ▪ Scarcity of essential productive resources – Certain types of skilled labour – Specific raw materials – Warehouse space – Unavailability of credit – Legal restrictions on the operations of the firm – Minimum wage laws – Pollution emission standards 1-39  Recognize the Nature and Relevance of Profits “It is not out of the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” 1-40  Nature and Relevance of Profits ▪ Overall goal of a firm is to maximize profits or the value of the firm. ▪ Two types of profits ✓ Accounting profits- Total revenue (sales) minus cedi cost of producing goods or services. o Reported on income statements of firms ✓ Economic profits- Total revenue (sales) minus opportunity cost o Opportunity cost- Explicit cost (cedi cost of producing a good or service)+ Implicit cost (cost of giving up the best alternative use of the resource) 1-41  Nature and Relevance of Profits ▪ Accounting Profit= TR -TCexplicit ▪ Economic Profit = TR-TCexplicit –TCimplicit. Problem 1 Enyonam operates a small shop at Makola specializing in party favors. She owns the building and supplies all her own labour and money capital. Thus, Enyonam incurs no explicit rental or wage costs. Before starting her own business Enyonam earned Ȼ 1,000 per month by renting out the store and earned Ȼ2,500 per month as a store manageress for a large Melcom store. Because Enyonam uses her own money capital, she also sacrificed Ȼ 1,000 per month in interest earned on Treasury bills. Enyonam monthly revenue from operating her shop are Ȼ 10,000 and her total monthly expenses for labour and supplies amounted to Ȼ 6,000. Calculate Enyonam’s monthly accounting and economic profits. 1-42 Solution. ▪ Total accounting profit is calculated as follows: Total revenue Ȼ10,000 Total explicit costs 6,000 Accounting profit Ȼ 4,000 ▪ Total economic profit is calculated as follows: Total revenue Ȼ10,000 Total explicit costs 6,000 Forgone rent 1,000 Forgone salary 2,500 Forgone interest income 1,000 Total implicit costs 4,500 Total economic costs 10,500 Economic profit (loss) Ȼ (500) 1-43  Importance of profits ▪ Profits signal to resource holders where resources are most highly valued by society. – Resources will flow into industries that are most highly valued by society. 1-44  Assignment If you or other managers in the industry are clever enough to identify strategies that yield a windfall to shareholders this quarter, there is no guarantee that these profits will be sustained in the long run. You must recognize that profits are a signal—if your business earns superior profits, existing and potential competitors will do their best to get a piece of the action. Therefore, how will you or other managers in the industry ensure sustainable industry profit? 1-45  Entry Entry costs Sunk costs Network effects Switching costs Speed of adjustment Economics of scale Reputation Government restraints Power of Input Suppliers Power of Buyers Supplier concentration Buyers concentration Price/productivity of Price/value of substitute alternative inputs Sustainable products or services Industry Supplier switching Profits Customer switching costs costs Government restraints Government restraints Industry Rivalry Concentration Substitutes and Complements Price, quantity, quality or service competition Price/value of surrogates products or Degree of differentiation services Switching costs Price/value of complementary products Timing of decisions or services Information Network effects Government restraints Government restraints 1-46 Understanding Incentives 1-47  Understanding incentives ▪ The principal-agent problem – Assign the same utility function to both parties – Incentive contract- linking manager compensation to performance- profit sharing, performance bonuses etc. An incentive contract between owner and manager is one in which the manager is provided with incentives to perform in the best interest of the owner – Other management incentives Job security- fired on poor performance Manager’s reputation-want to maintain his reputation Takeover (hostile)- capital market 1-48  Importance of Incentives ▪ Incentives determine: – How resources are utilized. – How hard individuals work. ▪ Constructing proper incentives will enhance productivity and profitability. 1-49 Understanding Markets 1-50  Understand Markets ▪ There are two-sides to every transaction in a market- for every buyer of a good there is a seller. ▪ The final outcome of the market process depends on the relative power of these two parties ▪ This relative power is limited by three sources of rivalry that exist in economic transaction: – Consumer-Producer rivalry- Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices – Consumer-Consumer rivalry- Scarcity of goods reduces consumers’ negotiating power as they compete for the right to those goods. – Producer-Producer rivalry- Scarcity of consumers causes producers to compete with one another for the right to service customers. – Role of Government- Disciplines the market process 1-51 Time value of Money 1-52  The Time Value of Money ▪ The gap between the time when the costs of a project are borne and the time when the benefits of the projects are received. ▪ The present value (PV) of an amount received in the future is the amount that would have to be invested today at the prevailing interest rate to generate the given future value Example: Suppose you are offered Ȼ11 one year from today. What is the value today. (the present value) if interest rate is 10%. FV PV = (1 + i ) n 1-53  Present Value vs. Future Value ▪ The present value (PV) reflects the difference between the future value and the opportunity cost of waiting (OCW). ▪ Succinctly, PV = FV – OCW ▪ If i = 0, note PV = FV. ▪ As i increases, the higher is the OCW and the lower the PV. ▪ If interest rate is zero, opportunity cost of waiting is zero, and PV=FV 1-54  Present Value of a Series ▪ Basic idea of the present value of a future amount can be extended to a series of future payments. ▪ FV1 one year in the future, FV2 two years in the future, and so on for n years, Present value of a stream of future amounts (FVt) received at the end of each period for “n” periods is: FV1 FV2 FVn PV = + +...+ (1 + i ) 1 (1 + i ) 2 (1 + i ) n ▪ Equivalently, n FVt PV =  t =1 (1 + i )t 1-55  Net Present Value ▪ Suppose a manager can purchase a stream of future receipts (FVt ) by spending “C0” cedis today. The NPV of such a decision is FV1 FV2 FVn NPV = + +...+ − C0 (1 + i ) 1 (1 + i ) 2 (1 + i ) n Decision Rule: If NPV < 0: Reject project- C > PV of the earnings of the project NPV > 0: Accept project – PV of the earnings exceeds cost (profitable) 1-56  Example of NPV ▪ Example: ▪ The manager of Automated Products is contemplating the purchase of a new machine that will cost Ȼ300,000 and has a useful life of five years. The machine will yield (year-end) cost reductions to Automated Products of Ȼ50,000 in year 1, Ȼ60,000 in year 2, Ȼ75,000 in year 3, and Ȼ90,000 in years 4 and 5. What is the present value of the cost savings of the machine if the interest rate is 8 percent? Should the manager purchase the machine? ▪ Hint: First, Calculate the PV, followed by the NPV. 1-57  Present Value of a Perpetuity ▪ An asset that perpetually generates a stream of cash flows (CFi) at the end of each period is called a perpetuity. ▪ The present value (PV) of a perpetuity of cash flows paying the same amount (CF = CF1 = CF2 = …) at the end of each period is CF CF CF PV Perpetuity = + + +... (1 + i ) (1 + i ) (1 + i ) 2 3 CF = i 1-58 Present Value of a Perpetuity ▪ Examples of such an asset include perpetual bonds and preferred stocks. – Each of these assets pays the owner a fixed amount at the end of each period, indefinitely. – For example What is the value of a perpetual bond that pays the owner Ȼ100 at the end of each year when the interest rate is fixed at 5 percent ? 1-59  Profit Maximization ▪ Present value analysis is also useful in determining the value of a firm. ▪ The value of a firm equals the present value of current and future profits (cash flows). 1 2  t PVFirm =  0 + + +... =  (1 + i ) (1 + i ) t =1 (1 + i )t ▪ A common assumption among economist is that it is the firm’s goal to maximize profits. – This means the present value of current and future profits, so the firm is maximizing its value. 1-60 Marginal Analysis 1-61  Marginal (Incremental) Analysis States that optimal managerial The optimal amount of decisions involve comparing the studying for this course is marginal (or incremental) determined by comparing (1) benefits of a decision with the the improvement in your marginal (or incremental) costs. grade that will result from an additional hour of studying ▪ Control Variable Examples: and (2) the additional costs of studying an additional hour. – Output So long as the benefits of studying an additional hour – Price exceeds the costs of studying – Product Quality an additional hour, it is profitable to continue to study – Advertising – R&D ▪ Basic Managerial Question: How much of the control variable should be used to maximize net benefits? 1-62  Net Benefits ▪ Let B(Q) = Total benefit derived from an activity C(Q) = Total cost of undertaking the activity Thus ▪ Net Benefits [N(Q)] = Total Benefits [B(Q)] - Total Costs [C(Q)] or N(Q) = B(Q) - C(Q) ▪ Profits = Revenue – Costs ▪ Let us now derive Marginal Benefits (MB), Marginal Costs (MC) and Marginal Net Benefit (MNB) 1-63  Marginal Benefit (MB) ▪ Change in total benefits arising from a change in the control variable, Q: B MB = Q ▪ Slope (calculus derivative) of the total benefit curve. 1-64  Marginal Cost (MC) ▪ Change in total costs arising from a change in the control variable, Q: C MC = Q ▪ Slope (calculus derivative) of the total cost curve. 1-65  Marginal Principle ▪ To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC. ▪ MB > MC means the last unit of the control variable increased benefits more than it increased costs. ▪ MB < MC means the last unit of the control variable increased costs more than it increased benefits. 1-66  The Geometry of Optimization: Total Benefit and Cost Total Benefits Costs & Total Costs Benefits Slope =MB B Slope = MC C Q* Q 1-67  The Geometry of Optimization: Net Benefits Net Benefits Maximum net benefits Slope = MNB Q Q* 1-68 Problem ▪ An engineering firm recently conducted a study to determine its benefit and cost structure. The results of the study are as follows: B(Y) = 300Y - 6Y2 C(Y) = 4Y 2 The Manager has been asked to determine the maximum level of net benefits and the level of Y that will yield that result. Hint: You need to calculate MC and MB first. 1-69  (1) (2) (3) (4) (5) (6) (7) Control Total Total Costs Net Benefits Marginal Marginal Marginal Net variable Q Benefits C(Q) N(Q) Benefit Cost Benefit B(Q) MB(Q) MC(Q) MNB(Q) Δ(4) or Given Given Given (2) – (3) Δ (2) Δ (3) (5) – (6) 0 0 0 1 90 10 2 170 30 3 240 60 4 300 100 5 350 150 6 390 210 7 420 280 8 440 360 9 450 450 10 450 550 1-70 Note: Sometimes managers are faced with proposals that require a simple thumbs up or thumbs down decision. Marginal analysis is the appropriate tool to use for such decisions; the manager should adopt a project if the additional revenues that will be earned if the project is adopted exceed the additional costs required to implement the project. In the case of yes-or-no decisions, the additional revenues derived from a decision are called incremental revenues. The additional costs that stem from the decision are called incremental costs 1-71 Problem Suppose that the total benefit and total cost from an activity are, respectively, given by the following equations: B(Q) = 150 + 28Q – 5Q2 and C(Q) = 100 + 8Q a. Write out the equation for the net benefits b. What are the net benefits when Q =1? Q=5? c. Write out the equation for the marginal net benefits. d. What are the marginal net benefits when Q=1? Q =5? e. What level of Q maximizes net benefits? f. At the value of Q that maximizes net benefits, what is the value of marginal net benefits? 1-72  Conclusion ▪ Make sure you include all costs and benefits when making decisions (opportunity cost). ▪ When decisions span time, make sure you are comparing apples to apples (PV analysis). ▪ Optimal economic decisions are made at the margin (marginal analysis). 1-73 AU Cruises is a company that owns and manages a large fleet of ships used primarily for cruises. Following a spike in tourist arrivals in Ghana, Diawuo, the firm’s managing director decided to increase the firm’s fleet by acquiring another rival business. With the short-term interest rate at 8%, AU Cruises used GHS9 million of its retained earnings to acquire the assets and settle the debts of the rival business, which is a local struggling business providing similar services. Diawuo’s acquisition was based on predicted additional annual sales of GHS2 million over first five years. After close review of the acquisition, the board of directors qualified Diawuo’s performance as poor and decided to immediately terminate his employment and appoint Darkoa, Diawuo’s assistant manager, as the acting managing director. Do you know what motivated the board of directors of AU Cruises to terminate Diawuo’s appointment? 1-74 End of Lecture One. 1-75