Question

ABC Inc. is a large company with two subsidiaries: ABCsoft which develops customized risk management software and ABCconsulting which provides risk management consulting services. Last year the total output of ABCsoft was $100 million and the total output of ABC consulting was $50 million. To achieve these levels of output, ABCsoft required $40 million of inputs from itself and $25 million of inputs from ABCconsulting, while ABCconsulting required $5 million worth of inputs from ABCsoft and $25 million units of inputs from itself. The U.S Federal Reserve is set to vote on a new law that would require all banks and insurance companies to adopt a new risk management standard. If the law passes ABC expects external demand for its software to increase by $25 million and external demand for its consultancy to increase by $30 million.

a.) From the information given above construct the technology matrix.

b.) Calculate how much will the total output of each of ABCs subsidiaries change if the law passes?

c.) Given the total output from last year determine the external demand levels that must have existed to cause those total output levels.

Answer 1

a.)

Technology Matrix

	ABC soft	ABC consulting
Total Output	$100 M	$ 50 M
External Input	$ 40M	$ 25 M
Internal Input	$25 M	$ 5 M

b.) ABC soft :

Existing Output = $100 M

Revised output if the law passes = $100 M + $25 M = $125 M

Change in Output = (($125 M - $ 100 M) / $100 M)*100 = 25%

ABC consulting

Existing Output = $50 M

Revised output if the law passes = $50 M + $30 M = $80 M

Change in Output = (($80 M - $ 50 M) / $50 M)*100 = 60%

c.) ABC soft

Total Output = $100 M

Required by ABC consulting = $5 M

Therefore, External demand level = $100 M - $5 M = $95 M

ABC consulting

Total Output = $50 M

Required by ABC consulting = $25 M

Therefore, External demand level = $50 M - $25 M = $25 M