Manegerial Economics

Amcott Loses $3.5

Million; Manager
Fired
Case Study Project

Prepared by: Group 1

 CASE STUDY - PAGE 2

Executive
Summary 
This study explains the reasons behind Ralph's removal as
manager of the Amcott. The case also provides information
and an answer as to why the management should reject
Magicword's project.
 Background
Amcott, a well-known software company, suffered a $3.5 million
loss, of which $1.7 million came from the foreign language
division. They borrow money from the First National at a 7% rate
for the short-term finances. Use the $20 million from retained
earnings to buy the Magicword rights for three years. A software
program called Magicword can translate common word processor
files with French text saved into English. Ralph’s plan was to
generate $7 million per year in sales by sinking $20 million into
Magicword. The software's first year's sales revenue was $7
million, but after that, sales slowed or ceased entirely.

CASE STUDY - PAGE 3

Challenge
The Amcott paid $1.7 million in damages as a
result of a copyright infringement that
belonged to a Magicword component and was
reported by Foreign, Inc. The event led to
Amcott firing Ralph, who was in charge of the
division's foreign language operations. Ralph,
however, disputed his accusations and insisted
that he was innocent.

Question: Why was Ralph fired from his

managerial post at Amcott?

CASE STUDY - PAGE 4

 CASE STUDY - PAGE 5

Answer
Ralph believed that the project would not incur any additional fees,
but his legal department had not completely considered all of the
potential legal ramifications on buying Magicword.

Furthermore, even if the Magicword is not in violation, Ralph should

have known that Amcott would lose more than $1.6 million by
purchasing the Magicword. Whereas the purchase of Magicword
would bring Amcott a net current value of:
Note
That if the net present value of a project is positive, then the project is
profitable because the present value of the earnings from the project
exceeds the current cost of the project. On the other hand, a manager
should reject a project that has a negative net present value, since the cost
of such a project exceeds the present value of the income.

From the calculation we get a negative amount of money, meaning

the project is not profitable for the company. Because the current
cost of the project exceeds the income stream that the project
generates.

CASE STUDY - PAGE 6

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Conclusion
In conclusion, Ralph was not fired because of the
mistakes of his legal department but for his poor
management skills. Ralph should have rejected
Magicword since he should have known that Amcott
would lose more than $1.6 million. In addition, Ralph did
not respond to the information that was presented to him
in a correct manner.
CASE STUDY PAGE - 8

References
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file:///C:/Users/user/Documents/2ND%20YEAR/ECO
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