“Market Structures and Cost Management” Please respond to the following:
From the scenario for Katrina’s Candies, determine the appropriate type of market structure for the situation in question. Cite at least four (4) defining characteristics that have helped you reach this decision regarding the appropriateness of the chosen structure. Imagine that you are a manager of a chemical company. An accident has occurred in which chemicals leaked into the ground water nearby. The community is unaware of the accident. Compare the primary costs involved in cleaning up the water immediately (and thus confessing) versus hiding your culpability now and possibly paying more in the future. Predict the impact on profitability in both situations. Alternative discussion topic:
Instead of discussing the hypothetical incident above involving a chemical company spill, you may want to examine, instead, the background surrounding GM’s 2014 recall of autos with faulty ignition switches. When did GM first discover the problem and what had finally prompted them to initiate the recall in 2014? What were the pros and cons of delaying this recall?
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ECO550 Week 5 Scenario Script: Market Structures
Slide # Scene # Narration
Slide 1 Scene 1
An older cottage style family run business (Katrina’s Candies)
Slide 2 Scene 2
In conference room with all Katrina’s Candies employees to get ready for a Webinar on Cost Analysis ECO550_5_2_Gigi-1: Good morning, everyone! I’m not sure if everyone received Herb’s email this morning, but we all will be attending a Webinar pertaining to Cost Analysis. If you need any assistance logging in please reach out to Herb.
ECO550_5_2_Herb-1: Thank you, Gigi! Just to recap how to log into this Webinar, simply follow the instructions I provided in my email this morning.
ECO550_5_2_Maria-1: Thanks again for getting this set-up Herb!
ECO550_5_2_Renee-1: Thank you as well Herb! I’m excited to see what all this Webinar entails.
ECO550_5_2_Gigi-2: Fantastic! Okay, is everyone now logged in and ready?
ECO550_5_2_Maria-2: Yes, I’m ready.
ECO550_5_2_Renee-2: Me, too.
ECO550_5_2_Herb-2: Yes, I’m ready as well; however, there’s been a slight change in the format. Instead of an actual person presenting to us, the consultant firm provided a pre-recording session.
ECO550_5_2_Gigi-3: Why? What happened, Herb?
ECO550_5_2_Herb-3: It turns out that the initial person scheduled to present to us had previously scheduled with another client. We could have rescheduled to a different day, but because of the deadline we’re confronting with the analysis we have to give Ken, I thought it best that we proceed using the pre-recorded webinar.
ECO550_5_2_Gigi-4: Herb, I think this is a good decision. We cannot afford to postpone anything at this point, just in case we hit a snag later.
ECO550_5_2_Renee-3: I have one question, Herb. How many times can we view this presentation just in case we need to go back to review key items?
ECO550_5_2_Maria-3: Good question Renee; I was wondering the same thing??
ECO550_5_2_Herb-4: Since the consulting firm caused the mix-up, the scheduler gave us unlimited views for the next two weeks.
ECO550_5_2_Renee-4: Wow, that is great!
ECO550_5_2_Maria-4: I agree, we definitely may need to view the presentation again, I’m glad we have some leeway with the viewing period.
ECO550_5_2_Herb-5: Let’s now get started! While watching this presentation please write down any questions you may have then we can address the questions once the presentation is concluded.
Slide 3 Scene 3
Incorporate Computer Screen to show Video about Cost Analysis
• Cost Analysis
Slide 4 Scene 4
In conference room with all Katrina’s Candies employees reviewing the Webinar they just participated in. ECO550_5_4_Gigi-1: That was a very good presentation on cost analysis. In such a short time period, I learned a lot.
ECO550_5_4_Maria-1: l learned a lot too!
ECO550_5_4_Herb-1: I think we all learned a lot!
ECO550_5_4_Renee-1: I definitely agree! Thank you for setting this up Herb!
ECO550_5_4_Herb-2: Does anyone have any questions on anything?
ECO550_5_4_Renee-2: Yes. As a group, there was one major question that we have.
ECO550_5_4_Herb-3: Oh, okay, what question is that?
ECO550_5_4_Maria-2: I will go over the question with you, Herb. I took really good notes on what everyone discussed after the presentation.
ECO550_5_4_Herb-4: Okay, that sounds good to me.
ECO550_5_4_Maria-3: Herb, last week when you reviewed cost concepts including, you identified the Break-even point as the point where Total Costs equals Total Revenue. Then you explained that minimum Average Total Costs is the decision-making variable firms should use to determine how much to produce and whether a firm was earning profit where Average Total Costs is the sum of Average Fixed Costs and Average Variable Costs.
ECO550_5_4_Herb-5: I’m following you thus far. Please continue.
ECO550_5_4_Maria-4: In today’s recorded webinar, the presenter explained the Break-even point differently. Our presenter explained the Break-even point as the outcome of the calculation of the Contribution Margin which subtracts out the variable costs term. The question we have is why should firms use the Contribution Margin approach to find the Break-even output instead of using the Total Revenue and Total Costs approach?
ECO550_5_4_Herb-6: Maria, that is a very good question. The answer is that the Total Revenue and Total Costs approach to finding break-even output gives a result that tells analyzers how much a firm should produce to cover all production costs. On the other hand, the Contribution Margin approach is a practical application used to evaluate the outcome of decisions that change fixed costs. For example, the decision Ken has to consider, whether to expand operations to go into the international market, is a decision that would change fixed costs. Decisions that affect fixed costs require a different type of analysis like contribution margin.
ECO550_5_4_Maria-5: Thanks, Herb. That’s a very clear answer to the question.
ECO550_5_4_Herb-7: Just in case I missed anything, here’s a six minute video that gives another example of how to calculate the contribution margin. Once you view this video, I would like for you to participate in a review activity I put together based on the key items we discussed.
Slide 5 Scene 5
Incorporate Ipad to show Video about Break Even Analysis
• Break Even Analysis Explained
Slide 6 Scene 6
Check Your Understanding
Multiple Choice Question
• A firm produces and sells a product with price, P = $16, average variable cost, AVC = $12 and total fixed cost, TFC = $60,000. What is the level of output at which the firm will break-even.
• Correct. Yes, given the contribution margin this level of output will yield a break-even for the firm.
• Incorrect. Try again, did you set the equation properly?
Slide 7 Scene 7
Concluding scene taking place in conference room ECO550_5_7_Herb-1: I hope the review activities were helpful everyone!
ECO550_5_7_Maria-1: I thought they were great, Herb! Thank you for sharing those with us; they were a great review tool.
ECO550_5_7_Renee-1: I agree, Maria; the review materials were very good!
ECO550_5_7_Gigi-1: I agree as well! Very nicely done Herb. Now to conclude our meeting I would like to do a review of what we accomplished today so I can update Ken.
ECO550_5_7_Herb-2: That sounds great! The main focus of our meeting today revolved around a Webinar presentation on Cost Analysis. We then talked about Break-even points, and I explained why firms use the Contribution Margin approach to find the Break-even output instead of using the Total Revenue and Total Costs approach.
ECO550_5_7_Maria-2: You also explained that the Total Revenue and Total Costs approach to finding break-even output gives a result that tells analyzers how much a firm should produce to cover all production costs.
ECO550_5_7_Renee-2: We continued our discussion on break-even points by learning that the Contribution Margin approach is a practical application used to evaluate the outcome of decisions that change fixed costs. We also noted that decisions which affect fixed costs require a different type of analysis like contribution margin.
ECO550_5_7_Gigi-2: Great job to all of you! I would say today was a success! I feel really good about meeting up with Ken and answering any questions he may have about the concepts we discussed today.
ECO550_5_7_Herb-3: That is fantastic, and I believe that is all for our meeting today. Remember to review the videos if you need to refresh your memory on the concepts. Until we meet again, don’t forget to complete your weekly threaded discussions based on the key concepts we covered this week.
ECO550_5_7_Maria-3: Thanks, Herb and have a great day everyone!
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