Question 1 20 pts John’s Pie Shop sells pies. Last year, it sold on average 1,000 pies per month and had the following average monthly total costs: Rent $ 1,000 Materials 10,000 Hourly labor 8,000 Manager’s salary 3,000 The normal selling price is $25.00 per pie, and John usually sells 1,000 pies per month. Costco has offered to pay John’s $20.00 per pie to supply them with 500 pies during the next month. (Assume that this is a one-time sale and future sales to Costco are not likley.) In addition, John’s Pies will incur a one-time transportation cost of $500 to deliver the pies to Costco. Assuming that John’s has the capacity to fill this order along with its other production, and that accepting this order will not cause problems with any of their other customers, should John’s Pies sell the 500 pies to Costco? Justify your answer Question 2 20 pts James takes $250,000 out of his brokerage account earning on average 10% per year and purchases 25 acres of land. He quits his $75,000-a-year job as a golf pro and opens up a golf driving range on the land. The range generates $200,000 in revenues each year. He spends $80,000 a year in employee salaries, $40,000 a year in golf balls and other golfing equipment and $10,000 in office supplies. What is James’ accounting or business profit? Explain. What is James’ economic profit? Explain. Assuming that James is indifferent between working as a golf pro and owning a driving range, should James continue to own the driving range? Why? Question 3 20 pts A permit in California to sell marijuana to retail customers sells for $100,000. The owner can sell the permit to others at any price. However,the owner of the permit can get back $80,000 as a refund from the state of California at any time if the owner of the permit decides not to use it. You paid $100,000 for this permit 3 years ago and currently own a retail store selling marijuana. Poor health makes you think about selling the permit. You therefor spend $6,000 on advertising hoping to get $88,000 for the permit. 1. What is your sunk costs? Explain. 2. Was your decision to spend $6,000 on advertising a smart thing to do? Use only the information above. Explain why or why not. After a long wait, suppose you get an offer of $82,500 for the permit. 3. Should you take the offer of $82,500? Explain why or why not. Question 4 20 pts You are a fanatic when it comes to keeping records for your car. You calculate every penny spent on your car and know exactly how many miles you drive. You drove 10,000 miles a year in 2018. Due to your great record keeping, you calculated that you spent $6,000 on your car in 2018. These costs included the costs of gasoline, a set of 4 tires, 2 visits to the mechanic for routine maintenance, license and registration fees, depreciation, principal and interest on your car loan. Your employer wants you to drive your own car to a conference for work. Your employer will pay you $0,57 cents per mile. Should you drive your own car or hitch a ride with someone else? Do you have enough information above to make that decision? Explain why or why not. Question 5 20 pts You are the New Product Manager for a medical device company. Your new product is at the end of testing and development and the product is expected to be launched in January 2020. If it is launched in January 2020, your finance expert recently told you that the “NPV of the project is greater than $0” and that the product will be “profitable to the firm over the 10 year life cycle of the product”. Today, you found out that your product needs to go through even more testing and development due to increased government regulation and that your product may not launch until January 2021. Without consulting your finance expert, how do you think this affects the assessment of going ahead and funding the development of the product? Explain.
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