You run a small bakery that makes about 1,000 muffins per day. You get offered a...

You run a small bakery that makes about 1,000 muffins per day. You get offered a large contract that needs you to make 3000 to 4000 muffins a day.

You know the bank will lend you the money to buy the ingredients and that is not a problem.

Should you accept the contract? What things do you need to consider? In the discussion give one or two points of what a company considering this offer must think about in the short run...

Expert Solution

There are several things to think about before accepting the contract. Capital is not a problem as the bank is ready to give the money. But the money has to be repaid with interest. The interest rates should not be too high as it will increase the cost of borrowings and the profits would have to be higher. In the short run, it needs to be seen if the order can be prepared. The contract required us to increase the size of production 3-4 times. This will involve a smilar increase in the inputs required for production. Not all the resources can be increased in the short run. You may require more land to set up a bigger bakery that may not be possible to acquire in the short run. Thus, the scalability fo the inputs is a major issue in the short run. We also have to ensure that the marginal cost of production is not too high. This will reduce the profit margin and make it less attractive to accept the contract.

Rahul Sunny answered 2 years ago

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