Finance 571 Wk 1

Guillermo Funiture Week 1

Fin/571

The Guillermo Furniture Store has some difficult decisions to make due to the increase in competition in the area and the decrease in profit. There are several solutions that can be made. The following paper will discuss three concepts that analyze different options for Guillermo Furniture Store.

According to Emery, Finnerty and Stowe, “There is an important corollary to the Principle of Self-Interested Behavior. Frequently, competing desirable actions can be taken. When someone takes an action, that action eliminates other possible actions. Informally, people often refer to an unused opportunity as an opportunity cost. More precisely, an opportunity cost is the difference between the value of one action and the value of the best alternative” (2007). In Guillermo’s Furniture Store Scenario, Guillermo Navallez, the owner, has a choice of two opportunities for the direction his company can take. The first is implementing new production equipment to decrease production time and employee hours. The second is to change the direction of the business to distribution. The opportunity cost is the difference in the value the best decision and the value of the alternative solution. Given the numbers for the projected net income before taxes, the Hitech equipment would net $195,564 and being a broker would only net $50,955. By choosing to become a broker, the opportunity cost would be $144,609.

Another concept that Emery, Finnerty and Stowe illustrate is,” The Behavioral Principle is a direct application of the Signaling Principle. The Signaling Principle says that actions convey information. The Behavioral Principle says, in essence, “Let’s try to use such information.” This principle also has an important corollary. Its application can lead to the free-rider problem. In such situations, a “leader” expends resources to determine a best course of action, and a “follower” receives the benefit of the expenditure by simply imitating. The...