PART 1

OBJECTIVE: The objective of this assignment question is to enhance the students' ability to analyse important basic economic concepts and tools pertaining to costs, which have direct managerial applications.

REQUIREMENT:

QUESTION 1 (CLO 3)

a. Different approaches are used in measuring costs, depending on the purposes for which the information is to be used. Discuss and distinguish the appropriate approach for:

i. Financial reporting

ii. Decision-making

b. Mary Graham has worked as a real estate agent for Piedmont Properties for 15 years. Her annual income is approximately $100,000 per year. Mary is considering establishing her own real estate agency. She expects to generate revenues during the first year of $2,000,000. Salaries paid to her employees are expected to total $1,500,000. Operating expenses (i.e., rent, supplies, and utility services) are expected to total $250,000. To begin the business, Mary must borrow $500,000 from her bank at an interest rate of 15 percent. Equipment will cost Mary $50,000. At the end of one year, the value of this equipment will be $30,000 even though the depreciation expense for tax purposes is only $5,000 during the first year.

i. Determine the (pretax) accounting profit for this venture.

ii. Determine the (pretax) economic profit for this venture.

iii. Which of the costs for this firm are explicit and which are implicit?

PART 2

OBJECTIVE: The objective of this assignment question is to enhance the students' ability to analyse important basic economic concepts and tools pertaining to pricing and output strategies.

REQUIREMENT:

QUESTION 3 (CLO3) 7

a. The Five Forces model of business strategy identifies threat of substitutes, threat of entry, power of buyers, power of suppliers, and the intensity of rivalry as the determinants of sustainable incumbent profitability in a particular industry. Discuss each of the Five Forces and provide relevant examples to support your answers.

b. Royersford Knitting Mills, Ltd. sells a line of women's knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand is estimated at -2.

i. Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost, and (3) total profits.

ii. If average variable costs are assumed to remain constant over a 10 percent increase in output, evaluate the effects of the proposed price cut on total profits.

QUESTION 4 (CLO3)

a. There are four elements that can be discussed to understand the major differences between perfect competition and monopoly; namely, price, output, profit and efficiency (productive and allocative). Explain these differences in detail. Use graph(s) to illustrate your answers.

b. A monopoly firm has the following demand curve: Q = 2,000 - 25P where Q is its monthly output. Assuming its monthly short-run total cost is described by the function STC = 500 + 8Q + 0.035Q2 Answer the following questions:

i. What will be its profit-maximising price and output?

ii. How much profit will it have at the preceding output?

PART 3

OBJECTIVE: The objective of this assignment question is to enhance the students' ability to analyse important basic economic concepts and tools pertaining to pricing and output strategies.

REQUIREMENT:

QUESTION 5 (CLO 3)

Read the following case and follow the instruction at the end of the case.

THE GLOBAL FOODS SDN BHD The Situation The last of the color slides was barely off the screen when Bakar, the CEO of Global Foods Sdn Bhd, turned to his board of directors to raise the question that he had been waiting all week to ask. "Well, ladies and gentlemen, are you with me in this new venture? Is it a 'go'? Shall we get into the soft drink business?"

"It's not that easy, Bakar. We need some time to think it over. You're asking us to endorse a very major decision, one that will have a long-term impact on the direction of the company."

"I appreciate your wish to deliberate further, Dr. Salleh," Bakar responded, "but I would like to reach a decision today. As the president of a major university, you have been especially valuable in advising this company in matters relating to social and governmental policies. But we must diversify our business very soon in order to maintain the steady growth in profits that we have achieved in recent years. As my presentation showed, the manufacturing and marketing of our own brand of soft drink is one of the best ways . It represents a significant diversification, yet it is very closely related to our core business: food.

"The economics of the soft drink market tell us that we would be foolish to pass up the kind of investment return that the market offers to those newcomers willing to take the risk. The food business is generally a mature one. On the other hand, our forecast indicates that there is still a lot of room for growth in the soft drink market. To be sure, there is a tremendous amount of competition from the 'red team' and the 'blue team.' But we already have expertise in the food business, and it should carry over into the beverage market."

"That's just it, Bakar," interjected another board member, "Are we prepared to take this risk? You yourself acknowledged that the market power wielded by the two dominant companies in this business is not to be taken lightly. Others have tried to take market share from them and have failed miserably. Moreover, the projections that you have shown for a growing soft drink market are based on the assumption that the growth rate will remain the same as it has been in the past ten years or so. As we all know, the soft drink market has been growing, but is has also been very fickle. Only recently, Malaysians were on the health kick, and fruit juices and bottled water along with health foods were in fashion. Now it seems that soft drinks are back in style again. Who knows what people will want in the future? Maybe we'll all go back to drinking five cups of coffee a day. And, what about all the money that we're going to have to spend up front to differentiate our product? As you well know, in the processed-food business, establishing brand recognition - not to mention brand loyalty - can be extremely difficult and costly."

"Well, ladies and gentlemen, all our concerns are certainly legitimate ones, and believe me; I have given much thought to these draw-backs. This is one of the biggest decisions that I will have made since becoming CEO. My staff has spent hundreds of hours analyzing all available data to arrive at a judgment. Our findings indicate a strong probability of earning an above-average return on an investment in the soft drink business, a return commensurate with the kind of risk we know exists in that market. But if we could make all our decisions with 100 percent certainty simply by feeding numbers into a computer, we'd all beout of a job. To be sure, details on production, cost, pricing, distribution, advertising, financing, and organizational structure remain to be ironed out. However, if we wait until all these details are worked out, we may be missing a window of opportunity that might not appear again in this market for a long time. I say that we should go ahead with this project soon as possible. And unanimity among the board members will give me greater confidence in this endeavor".

You are required to do the following:

(a) Deliberate on the situation (market outlook);

(b) Ask yourself the key questions (demand and market structure, etc);

(c) Identify related activities in the supply chain (production and supply);

(d) Determine data, facts, and information needed (for making decisions); and

(e) Answer the key question: Should Global Foods (GF) enter the soft drink business?