FACTOR MARKETS AND PRODUCTION
Case Study #1: The Case of "The Sugar Shack"
You are a team of professional economic analysts. You meet with each of your clients on at least an annual basis. A client whom you have not seen for a year makes his annual visit, and informs you that he inherited a candy store called The Sugar Shack the day after his last consultation. He gave up his job as a butcher at the local grocery, which paid him $26,000 annually, to run the candy store. He hired two full-time employees and six part- time employees at annual wages of $90,000. He spent $100,000 on candy inventories. The cost of utilities, insurance, and other miscellaneous expenditures was $12,000. His revenue for the year was $235,700.
He is elated because his accountant has informed him he made a substantial profit, and he expects praise from you, too.
Here are some facts for the economic analysis team:
The building your client inherited could be rented for $600 per month.
The candy inventory has a market value of $35,000 at year-end. If he stays in business, he will keep the candy.
If he goes out of business, he could sell the candy for $35,000, which could be safely invested at an annual return of 10%.
Questions for Analysis
1. List the accounting costs of operation. Identify each item or category, the specific amount, and the total.
2. Determine the accounting profit. Show your math and label your numbers.
3. Identify the opportunity costs of operation. Identify each item or category, the specific amount, and the total.
4. Determine the economic cost of production by adding the accounting costs to the opportunity costs. Show your math and label your numbers.
5. Calculate the economic profit (or loss). Show your math and label your numbers.
6. Ceteris paribus (that is "all other things equal," or assuming no changes to performance in future years and no change in costs), what advice would you give as the economic analysis team?
7. Assume that the proprietor(s) have non-economic factors which affect the decision as follows: Your client states that it is worth $4,000 annually to be his own boss and not be a butcher any more. Would that change your advice? How and why?

FACTOR MARKETS AND PRODUCTION Case Study #1: The Case of &quot;The...

FACTOR MARKETS AND PRODUCTION Case Study #1: The Case of "The...