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David answered on
Dec 21 2021
MGT 630 – OM 630 Final Exam Review Questions
1. Angela Bates, who works in a duplicating (photocopying) establishment for $20,000 per year, decides to open a small duplicating business of her own. She runs the operation by herself without hired help and invests no money of her own. She rents the premises for $15,000 per year and machines for $25,000 per year. She spends $10,000 per year on supplies (paper, ink, envelopes), electricity, telephone, and so on. During the year, her gross earnings are $75,000.
A. Is she successful in an accounting sense? Why or why not?
Answer:
Accounting Cost is equal to Sales revenue minus all costs except cost of equity capital.
In the question above, Accounting Cost= 75,000- (15,000+25,000+10,000)
Accounting Cost= 75,000-50,000
Accounting Cost= $25,000
Hence, Angela is successful in the accounting sense.
B. Is she successful in an economic sense? Why or why not?
Answer:
Economic Cost is equal to Sales revenue minus all costs including opportunity cost.
In the question above, Economic Cost= 75,000- (15,000+25,000+10,000+20,000)
Economic Cost= 75,000-70,000
Economic Cost= $5,000
Hence, Angela is successful in the economic sense but less successful as compared to the accounting sense.
C. Should she remain in business after her first year, if she has no strong preferences between working for herself and working for others in a similar capacity? Explain.
Answer:
As the economic cost earned is $5,000. As she has no strong preference for working individually or with a firm, she should choose to work with the firm. Sales are unpredictable and hence might fall or rise in the next year. Thus, Angela should prefer working for others.
2. Airway Express has an evening flight from Los Angeles to New York with an average of 80 passengers and a return flight the next afternoon with an average of 50 passengers. The plane makes no other trips. The charge for the plane remaining in New York overnight is $1,200 and would be zero in Los Angeles. The airline company is contemplating eliminating the night flight out of Los Angeles and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed costs for the plane are $3,000 per day whether it flies or not.
A. Should the airline replace its night flight from Los Angeles to New York with a morning flight? Why or why not?
Answer:
The revenue earned from the evening flight= No. of Passengers*Ticket fare- night charge- operating costs- fixed costs
Revenue= 80*200-1200-14,000= 16000-15200=$800
Evening flight revenue= $800
Similarly, if this flight is replaced with a morning flight,
Revenue= No. of Passengers*Ticket fare- operating costs- fixed costs
Revenue= 70*200-14,000= 14000-14000=$0
Morning flight revenue= $0
Hence, the airline should not replace its evening flight with a morning flight as the revenue earned falls from $800 to $0
B. Should the airline remain in business? Why or why not?
Answer:
The revenue earned from the evening flight= No. of Passengers*Ticket fare- night charge- operating costs- fixed costs
Revenue= 80*200-1200-14,000= 16000-15200=$800
Evening flight revenue= $800
The revenue earned from the return flight:
Revenue= No. of Passengers*Ticket fare- operating costs- fixed costs
Revenue= 50*200-14,000=10000-14000=(-)4000
Total revenue earned= (-)4000+ 800= (-) 3200
The airline incurs a loss of $3200 and hence should not remain in business.
3. Consider the case of Apple Computer, Inc. The firm cu
ently experiences the following internal and external (i.e. market) characteristics:
· Easy access to distribution channels, as illustrated by direct-to-the-customer sales
· Achievement of constant returns to scale at relatively low levels of output (i.e. the firm achieves minimum efficient scale relatively quickly)
· Unique component suppliers
· Operation in a fragmented industry structure (i.e. the PC industry is fragmented)
· Price competition is the focus of competitive strategic tactics used in the PC industry
· High fixed costs relative to variable costs in the PC industry
· Relatively slow growth rates of demand in the PC industry
A. Based upon Porter’s model, does the existence of easy access to distribution channels and small minimum efficient scale indicate high or low ba
iers to entry in the PC industry? Why?
Answer:
As per Porter’s Model, the easy access to distribution channels and small minimum efficient scale act as low ba
iers to entry. The reason being these features make the market attractive for other producers and provide easy accessibility.
B. Based upon...