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Operating a business

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1. Suppose you decide to open a copy store. You rent store space (signing a one-year lease to do so), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the costs of paper and utilities, doesn't cover all your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?

2. When the DuPont chemical company first attempted to enter the paint business, it was not successful. According to a company report, in one year it "lost nearly $500,000 in actual cash in addition to an expected return on investment of nearly $500,000, which made a total loss of income to the company of nearly a million." Why did this report include as part of the company's loss the amount it had expected to earn - but didn't - on its investment in manufacturing paint?

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Solution Summary

The answer to this problem explains the operating of a business. The references related to the answer are also included.

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1. You should continue operating your business. Since the revenue you receive covers your variable costs, the wages of your employees and cost of paper, and utilities, and contributes partially to your fixed costs, namely a part of the interest on the loan you took to purchase the copiers and a part of your rent. Now the rent and interest on the loan you took out are fixed costs and have to be incurred in the short run. If you stop ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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