Penalty Rates Given Imposed By Government â€Myassignmenthelp.Com

Question: Discuss About The Penalty Rates Given Imposed By Government? Answer: Introducation The Caf Cartagena operated 10 hours on each Sunday and has 5 employees. The penalty rates given imposed by the government for working on Sundays are $40 per hour. This let the employees earn $400 each on Sunday. The cost of salary for the caf owners is 400*5=$2000. The others costs including coffee cups and electric charges are $500. The cost of coffee machines is $1000. All these summed up to derive the accounting or explicit cost of the caf. This amount fell when government reduced the penalty rate to $20 and that further reduced total accounting cost. The implicit costs are being the opportunity cost the firm undertakes for running the coffee shop on Sundays. The economic profit and accounting profit figure also changed and shown in the following tables. Total Revenue from sales per Sunday $12,000 Explicit Cost Wages to employees $2000 Other costs (Coffee cups, electric etc) $500 Cost of coffee machine $1000 Total Explicit Cost $3500 Accounting Profit (less Explicit Cost) $8500 Table 1: Accounting Profit (Before Cut) Total Revenue from sales per Sunday $12,000 Explicit Cost (After Cut in Penalty Rate) Wages to employees $1000 Other costs (Coffee cups, electric etc) $500 Cost of coffee machine $1000 Total Explicit Cost $2500 Accounting Profit (less Explicit Cost) $9500 Table 2: Accounting Profit (After Cut) Total Revenue from sales per Sunday $12,000 Implicit Cost Rent of coffee shop on Sunday $1500 Total sacrifice made from withdrawing cash from bank $400 Total opportunity cost of owning business over job $800 Total Implicit Cost $2700 Total Explicit Cost $3500 Economic Profit (less Explicit Cost and Implicit Cost) $5800 Table 3: Economic Profit (Before Cut) Total Revenue from sales per Sunday $12,000 Implicit Cost (After Cut in Penalty Rate) Rent of coffee shop on Sunday $1500 Total sacrifice made from withdrawing cash from bank $400 Total opportunity cost of owning business job $800 Total Implicit Cost $2700 Total Explicit Cost $2500 Economic Profit (less Explicit Cost and Implicit Cost) $6800 Table 4: Economic Profit (After Cut) The average total cost defines the per unit cost of production. This can be derived by dividing total cost by total units of coffee sold. At this point, we consider total cost to be total accounting cost hence ATC= TC/Q = $3500/4000 = $0.875 After the cut in penalty rate by the government the total accounting or explicit cost fell to $2500 that further reduced average total cost equals to $2500/4000= $0.625 The concept of sunk cost refers to the cost made in production that can not retrieved or recovered back by any means. This is similar to fixed cost incurred in any production with only difference being fixed cost is the payment made inform of investment or contractual deal and can have possibility to be revered with higher scale of production and sales that would generate more revenue and profit. Higher ale would die down the fixed cost incurred with falling average and total cost of production and service. This combined with higher revenue earned reaps higher profit and the fixed cost becomes recovered over time. However, sunk cost is different. It is more like onetime payment or cost incurred that have no possibility or scope to be recovered by means of production, sales or any strategies. In our case study, the Caf incurs explicit cost and implicit cost respectively. Before the cut in the penalty rate there has not been any sunk cost in the business since all the costs made for pa ying the salary of employees, other cost including electric, coffee cup etc, cost of coffee machine and the opportunity cost of selling coffee on Sunday in Cartagena. After the government reduced the penalty rate of working on Sunday from $40 to $ 20, the caf incurred lower explicit cost with implicit cost remaining same. This increased the economic profit and accounting profit both in terms of extra earning. This induced them to celebrate and for that they drew cash of $1000 which they never returned. Now this amount can be treated as sunk cost, because this cannot be retrieved back through the means of selling coffee that also under no action taken by them in order to sale more and earn more profit. Cartagena operates in an extremely competitive market. Due to that they can not increase the price per cup of coffee in the shop because they know doing so will reduce the consumers of their service and that can be drastically low up to zero also. However, the owners have the ability to sell any number of coffees at the prevailing price of $3.00 per cup of coffee. This leads to elastic demand curve since for one unit increase in price no matter how small, the change in demand is infinitely large and falls to zero making the slope of the demand curve infinite and it looks like horizontal line. Due to operating in highly competitive market, they knew that they wont be able to make any changes in prices since that would lead to greater fall in the demand ultimately incurring loss. But they had the opportunity of increasing sales up to any units more than they did on each Sundays. Operating at their full capacity they were able to sell 4000 cups of coffees per Sunday. When the government reduced penalty rate it reduces accounting cost of the firm and increasing the economic profit than before. At this point they could hire more employees since per employee salary cost now reduced to half of the amount incurred previously. Utilizing the lower penalty rate, they could easily higher more and sell more to earn more. But they did not do so. Apparently, their decision might seem irrational but they actually took good decision. To justify this it can be highlighted from the case study that they were operating at full capacity. No matter how much more they employ, it was not possible to earn more if the capacity was not expanded. To extend and expand the capacity of production business plan and larger cost would have to be incurred. 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