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ECON 802: THE ECONOMICS OF GLOBAL BUSINESS CHALLENGES
CASE STUDY ANALYSIS # 1
Karen: Math Teacher or Business Girl?
Important ? Please keep in mind to avoid disappointment
A Business Report is a very important document where you have to show not only your knowledge but also your capacity to follow instructions to the letter. It is imperative that you take into account each and every detail provided in the following statement.
1. Statement of the Case Study
Karen is a young math teacher, but a year ago she decided to take a year’s leave without pay to start a new business. Karen became the owner of a coffee shop with ten brand new coffee machines(total cost $100,000). She knew that starting a new business was a risky decision and she expected a remuneration of $15,000 for risk-taking. Her salary as a teacher was $80,000 per year. Karenhad some savings in the bank earning an interest of 10 per cent a year. She withdrew $100,000 from her savings account to buy the coffee machines. Karenhired five university students to help her, paying an aggregate annual salary of $90,000. She spent $125,000 on coffee beans and $20,000 on other expenditures (electricity, cleaning, etc.).
At the end of the year the resale value of the ten coffee machines was $50,000.This drastic reduction in the resale value of the coffee machines did not take her by surprise because she was perfectly aware that producers of coffee machines actively compete through innovation, and consequently, depreciation due to creative destruction cannot be ignored. She also knew that the standard accounting practice is to depreciate equipment at the rate of 15 per cent a year.The coffee shop was located at a university campus with high number of students and strong competition from inside and outside the university.The prevailing price was $4.00 per cup of coffee and she knew that she could sell any quantity of coffee at this price. A previous coffee shop owner tried to sell coffee at $4.05 per cup but went out of business because he was able to sell only a minuscule number of coffee cups.Karenoperated at full capacity and was able to sell a total of 500,000 coffees at $4.00 each. The coffee was sold in environmentally friendly cups costing a total of $65,000. Things were so well that Karentook out from the firm $30,000 to buy a fancy Mini Cooper.
A friend of Karenwas an undergraduate business student who told her that for her business to be worthwhile she should be making at least normal profit. He also told her that if she wanted to go back to her job sunk costs should not be overlooked. But he did surface learning and did not remember the meaning of that. At the end of the year,Karen was curious about the profit she made last year and consulted an accountant and an economist. She provided all the above mentioned information to the accountant and the economist. To her surprise, they come up with different values for the total profit before tax. This was very disturbing and confusing for Karenand she decided to consult an ECON 802 student to organize her thinking.Karendecided that she will leave the industry unless she made abnormal profits last year.
Important (Please keep in mind to avoid disappointment)
A Business Report is a very important document. You must address the tasks with the maximum attention and take this assignment very seriously. Untidy Business Reports imply lack of interest in your assignment. You must identify each task in your Business Report according to the instructions that can be found in the Compulsory Format. It is a serious mistake not to do so. Failure to identify the tasks or follow the other requirements explicit in the Compulsory Formatwill result in a reduction of your total mark, depending on the number of tasks not identified or omissions incurred. Minimum penalty ten (10) marks. Do not squander marks.
2. Your tasks
You have to write a Business Report where you address the following four (4) tasks:
Task 1: What is the dollar value of the normal profit in this case study?(Fill in the blank in Table 1).
Concept Dollar value
Normal profit $
Table 1
(Computations to arrive at the required result must be in the Appendix)
Task 2:Profit figure that the accountant arrived at (Fill in the blank in Table 2).
Concept Dollar value
Accounting profit $
Table 2
(Computations to arrive at the required result must be in the Appendix)
Task 3:Profit figure that the economist arrived at (Fill in the blank in Table 3).
Concept Dollar value
Economic profit $
Table 3
(Computations to arrive at the required result must be in the Appendix)
Task 4:Whether or not it is a good idea for Karento remain in business assuming that all the information provided in this case study will be exactly the same next year. Explain carefully.
Important (Please keep in mind to avoid disappointment)
? Tidy Presentation Required
A Business Report is a very important document. You must address the tasks with the maximum attention and take this assignment very seriously. Untidy Business Reports imply lack of interest in your assignment.
? Identifying Tasks
You must identify each Task in your Business Report. This means that you have to state (like a sub-heading) each Task immediately it before the paragraph/s developing it. For example,
“Task 9
To develop this task, I will use … “
Failure to identify the tasks or follow the other requirements explicit in the Compulsory Format will result in a reduction of your total mark, depending on the number of tasks not identified or omissions incurred. Maximum penalty ten (10) marks. Do not squander marks.

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