Question

Jimmy is the owner of VRS Pty Ltd. Until recently, Jimmy was also the managing director, but he has decided to employ a manager to take over the daily operations of VRS as he transitions to retirement. The new manager, Beryl, agreed to a performance based contract which says that Beryl will be paid a bonus of $200,000 should the profits exceed a target of $2 million. The contract also says that Beryl must prepare financial statements and have them audited. Identify and describe three (3) agency costs. In your response identify and describe the agency costs outlined in the scenario above. Has Jimmy reduced his agency costs? Justify your response.

Answer 1

There are three types of agency cost which are as follows;-

1) Cost of monitoring so amount paid to beryl $200,000 if the company profit exceeds $20 million is the monitoring cost.

2) Bonding costs it includes the cost of contractual obligation to stay with the company as mentioned the a good beonus is paid if profit exceeds $20million.

3) if agent neeeds more than the actuall and cost of monitoring and bonding is not enough than extra cost is incurred that is known as residual losses as in the case bonus is also a residual losses

It can say that jimmy reduced his agency costs as jimmy has given new target to the beryl which includes sales target and he is also make reponsibe for preparing financial statements and get them audited so we can say jimmy has reduced the residual cost by assigning more work