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ACCT11-100 Lecture Notes - Lemonade Stand, Lemonade, Market Risk

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almas8
22 Feb 2022
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Bond University
Department
ACCT
Course
ACCT11-100
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Document Summary

Factors of production: economic resources are the goods or services available to individuals and businesses used to produce valuable consumer products. You may have at some point in your life been part of or seen local neighborhood children running lemonade stand. Running a lemonade stand is probably the simplest example that displays one of the main goals of our economic system: to make a profit. In order to make a profit, a person usually needs certain things, or certain economic inputs. The economic inputs used to make a profit are called factors of production. According to traditional economic theory, there are four main factors of production: land, labor, capital, and entrepreneurship (organization). Entrepreneurship is also considered an economic resource because individuals are responsible for creating businesses and moving economic resources in the business environment. These economic resources are also called the factors of production. Land: in its simplest form, land is the physical place where economic activity takes place.

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Related Questions

Take an example from our childhood entrepreneurial endeavors(running a lemonade stand or neighborhood lawn mowing services,making crafts to sell at a local crafts fair, babysitting, etc.).Imagine these products and services as businesses, in which you arethe manager with several teenagers as your employees.

Define the “jobs” in job costing. Explain how you would measuredirect materials cost, direct labor cost, and compute predeterminedoverhead rates. What are your actual manufacturing overhead costs,and why aren’t they traced to jobs, just as direct materials anddirect labor are traced to jobs? Give reasons why overhead might beunder-applied or over-applied in a given year. What factors shouldbe considered in selecting a base to be used in computing thepredetermined overhead rate? Why?

A paper published in the Harvard Business Review points out a new way to calculate economic profit that could be more appropriate for service firms and other “people-intensive” companies. Instead of focusing on investment and return on investment, the focus is on employee productivity, both in terms of generating revenues and reducing costs.

The approach is to first determine economic profit in the conventional way, except that we ignore taxes, so that economic profit is before tax, as follows:
Economic profit = Operating profit − Capital charge

Assume the following information for a hotel chain that wishes to adopt the new method. The firm has $100 million in operating profit, $1 billion in investment, and uses a cost of capital rate of 5%, so the capital charge is $50 million and the economic profit is $50 million. Relevant calculations are contained in Part 1 of the following schedule. Use the following information in the table on the bottom.
Part 1: Economic Profit (in thousands, except cost of capital rate)
Revenue $500,000
Operating costs:
Personnel costs 300,000
Other costs 100,000
Operating profit $100,000
Operating profit before personnel costs (OPBP) $400,000
Investment (capital) $ 1,000,000
Cost of capital, rate 0.05
Capital charge $50,000
Economic profit = Operating profit − Capital charge $50,000
Part 2: Economic Profit Calculated Using Employee Productivity
Number of employees 10,000
Employee productivity:
Operating profit before personnel cost per employee ($400,000/10,000) $40
Capital charge per employee ($50,000/10,000) 5
Employee productivity $35
Less personnel cost per employee 30
Economic profit per employee = Productivity − Cost $5
Total economic profit, all employees $50,000
Note: All numbers in thousands except for number of employees

The next step is to decompose economic profit using employee productivity. To do this we first determine operating profit before personnel costs (OPBP):
OPBP = Operating profit + Personnel costs
$400,000 = $100,000 + $300,000

Employee productivity can be determined by calculating OPBP less capital charge, per employee. For this example, since there are 10,000 employees, OPBP is $40,000 per employee and the capital charge is $5,000 per employee, so that productivity is $35,000 per employee. The next step is to determine personnel cost per employee, $30,000, and subtract that from employee productivity to obtain economic profit per employee, $5,000 (i.e., $35,000 − $30,000). Total economic profit for all employees is thus $5,000 × 10,000, or $50 million, the same amount as determined in the conventional way. The value of the decomposition of economic profit into employee productivity and personnel costs per employee is that it provides measures that the hotel chain can benchmark to other hotel chains. It also provides a direct measure of the profit that is being generated per employee relative to the average personnel cost for each employee. Measures of revenue per employee and personnel cost per employee are widely used in the hospital, health and human services, and other people-oriented service industries.

Source: Felix Barber and Rainer Strack, “The Surprising Economics of the People Business,” Harvard Business Review, June 2005, pp. 81–90.
Required:

Use the above approach and assume a chain of residential care facilities employs 10,000 people, has a cost of capital of 6%, and has the following information (000s).
Revenue $ 660,000
Operating costs
Personnel costs 370,000
Other costs 180,000
Operating profit $ 110,000
Investment $ 1,500,000

Determine the productivity per employee, personnel costs per employee, and economic profit per employee. (Enter your answers in thousands.)

A paper published in the Harvard Business Review points out a new way to calculate economic profit that could be more appropriate for service firms and other “people-intensive” companies. Instead of focusing on investment and return on investment, the focus is on employee productivity, both in terms of generating revenues and reducing costs.

The approach is to first determine economic profit in the conventional way, except that we ignore taxes, so that economic profit is before tax, as follows:
Economic profit = Operating profit − Capital charge

Assume the following information for a hotel chain that wishes to adopt the new method. The firm has $100 million in operating profit, $1 billion in investment, and uses a cost of capital rate of 5%, so the capital charge is $50 million and the economic profit is $50 million. Relevant calculations are contained in Part 1 of the following schedule. Use the following information in the table on the bottom.
Part 1: Economic Profit (in thousands, except cost of capital rate)
Revenue $ 500,000
Operating costs:
Personnel costs 300,000
Other costs 100,000
Operating profit $ 100,000
Operating profit before personnel costs (OPBP) $ 400,000
Investment (capital) $ 1,000,000
Cost of capital, rate 0.05
Cost of capital, rate $ 50,000
Economic profit = Operating profit − Capital charge $ 50,000
Part 2: Economic Profit Calculated Using Employee Productivity
Number of employees 10,000
Employee productivity:
Operating profit before personnel cost per employee ($400,000/10,000) $ 40
Capital charge per employee ($50,000/10,000) 5
Employee productivity $ 35
Less personnel cost per employee 30
Economic profit per employee = Productivity − Cost 5
Total economic profit, all employees $ 50,000
Note: All numbers in thousands except for number of employees

The next step is to decompose economic profit using employee productivity. To do this we first determine operating profit before personnel costs (OPBP):
OPBP = Operating profit + Personnel costs
$400,000 = $100,000 + $300,000

Employee productivity can be determined by calculating OPBP less capital charge, per employee. For this example, since there are 10,000 employees, OPBP is $40,000 per employee and the capital charge is $5,000 per employee, so that productivity is $35,000 per employee. The next step is to determine personnel cost per employee, $30,000, and subtract that from employee productivity to obtain economic profit per employee, $5,000 (i.e., $35,000 − $30,000). Total economic profit for all employees is thus $5,000 × 10,000, or $50 million, the same amount as determined in the conventional way. The value of the decomposition of economic profit into employee productivity and personnel costs per employee is that it provides measures that the hotel chain can benchmark to other hotel chains. It also provides a direct measure of the profit that is being generated per employee relative to the average personnel cost for each employee. Measures of revenue per employee and personnel cost per employee are widely used in the hospital, health and human services, and other people-oriented service industries.

Source: Felix Barber and Rainer Strack, “The Surprising Economics of the People Business,” Harvard Business Review, June 2005, pp. 81–90.
Required:

Use the above approach and assume a chain of residential care facilities employs 15,000 people, has a cost of capital of 6%, and has the following information (000s).
Revenue $ 600,000
Operating costs
Personnel costs 360,000
Other costs 150,000
Operating profit $ 90,000
Investment $ 1,000,000

Determine the productivity per employee, personnel costs per employee, and economic profit per employee. (Enter your answers in thousands.)

Productivity per employee
Personel cost per employee
Economic profit per employee