The scenario of Mrs. McCarthy and her sewing business
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Okay back to Mrs. McCarthy you advise her to invest in bulk purchasing. What you did not know is that is she was working off her savings. Also she was not a well person (common for elderly people). And she decides to die a week later (also common amongst elderly) what do you tell the heirs about their inheritance, which is now bolts of material?
Yet there are factors that support going to fixed cost structure. Why would you still advise against it in light of the facts that support it?
Assuming no other issues what facts provided would make the advice to go to a fully fixed structure a wise decision? Why?
What would be the cost driver in going shopping for food?
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Solution Summary
This solution addresses the financial scenario of Mrs. McCarthy and her sewing business. The main questions addressed in this solution include:
Yet there are factors that support going to fixed cost structure. Why would you still advise against it in light of the facts that support it?
Assuming no other issues what facts provided would make the advice to go to a fully fixed structure a wise decision? Why?
What would be the cost driver in going shopping for food?
Solution Preview
Her death is what's called an assumed business risk. Businesses have assumed risks -- the risk of certain natural disasters, the risk of economic downturn, the risk that key people (also called a key man) will die during the life of the business. Her death is nothing more than an assumed risk that is present with every business, regardless of her age. I would tell her heirs the same thing that I would tell the CEO of a large manufacturing company that died -- that the material was purchased through the normal course of operations. In her case, we'll assume that she is a sole proprietor, which means that when she dies, the business ceases to exist. In the case of a corporation, the death of an owner would have no effect on the business continuing to stay open. The owner's death would not close the ...
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