MBA 620 University of Maryland Week 1 Applied Economics for Managers Project

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Oraml

Business Finance

MBA 620

University of Maryland University College

MBA

Description

Project 1: Applied Economics for Managers
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Scenario

You have recently been hired as an economic analyst by Maryland Creative Solutions LLC (MCS), a company specializing in mergers, acquisitions, and consulting. Prepare for your first day by reviewing your job description below:

Job Description

Position Title

Economic Analyst

Reports To

Frank Marinara, Senior Partner Finance

Job Overview

The Economic Analyst provides support to Maryland Creative Solutions by performing client assessments, financial reporting, and development models for economic analysis.

Responsibilities and Duties

  • Develops and maintains models to support economic analysis and investment decision making, long- and short-term planning, enterprise valuation, portfolio evaluation, mergers & acquisitions, strategy, and competitor analysis.
  • Supports the assessment and recommendation of improvements to the financial and performance planning systems (including external and management reporting systems).
  • Supports senior management in performing ad hoc analysis and supports the CFO to manage the company's financial framework.
  • Prepares presentations to the board of directors and shareholders and supports preparation of internal presentations and financial analyses.

Qualifications (Preferred but not required)

  • Education: Bachelor’s
  • Experience: 2–3 years’ experience preferred with business finances
  • Skills include: financial reporting, presentation development, planning, and evaluation
  • Team player, creative thinker, fiscally responsible

Maryland Creative Solutions (MCS) is an equal opportunity employer and complies with all applicable federal and state laws regarding nondiscrimination. MCS is committed to a policy of equal opportunity for all persons and does not discriminate on the basis of race, color, national origin, age, marital status, sex, sexual orientation, gender identity, gender expression, disability, religion, ancestry, political affiliation or veteran status in employment, educational programs and activities, and admissions.

You’ve been in your new analyst role with Maryland Creative Solutions, LLC for a few days and are finally getting used to the rapid workflows and office culture. After a competitive bidding process, MCS has signed a consulting contract with ExxonMobil. You receive an email from senior partner, Frank Marinara, tasking you with your first assignment to support the project.

INBOX (1 NEW EMAIL)

From: Frank Marinara, MCS Senior Partner

To: You

Now that you've settled in, I need your help with an industry analysis. ExxonMobil accepted our consulting bid, and now the CFO needs us to assess its positioning within the oil and gas industry. I would like you to analyze the data provided. We need to know the price and quantity of crude oil where equilibrium exists, and it will be helpful to discover the market structure of the industry. I will need this done by the end of this week.

If it goes well, I'll also need you to investigate price elasticity so we can advise the client on a pricing strategy for one of its local franchisee stations.

Two weeks from now, I’d like you to attend a special project meeting with senior consultants from across MCS. Keep in mind, you will be the only employee in the meeting that is not on the senior consultant level, so please be as prepared as possible. The meeting has been called to discuss world oil price movements and their impact on ExxonMobil’s business. Come ready to discuss the world oil price movements expected within the next few weeks.

Finally, I'll be asking you to develop an executive summary based on your work on this project.

Follow the project steps to get started on the industry analysis for ExxonMobil.

Best,

Frank

Frank Marinara Contact Information

Step 1: Complete Skills Gap Analysis

As you’re about to get started on your assignment, the Human Resources department at MCS sends you an email with an attachment requesting that you complete a self-evaluation of your skills.

INBOX (1 NEW EMAIL)

From: Jennifer Craylin, Human Resources Generalist

To: You

I hope this email finds you well, and that you are settled in at Maryland Creative Solutions. It is Human Resource policy to request your completion of a performance self-evaluation. Please use the attached skills gap analysis file to self-evaluate your work-related knowledge and skills before beginning work on your assigned projects.

The skills gap analysis will help you identify the skill areas you want to enhance. You will be completing another self-evaluation in Project 5 to measure the gains in competencies you have developed through working with MCS.

Complete your preliminary skills gap analysis by the end of Week 1. Carefully follow the instructions below:

  • Use the attached skills gap analysis file to self-evaluate your course-related knowledge and skills before beginning your work with MCS. Use the Week 1 worksheet to complete this step.
  • From each major category, select a gap you would like to work on reducing during the next 10 weeks to help you achieve your long-term career goals.
  • Decide what activities you will engage in to acquire the knowledge and hone the skills you have identified. Think creatively, and consider all appropriate resources, such as conferences, books, free online classes, mentorship, coaching, observation, professional associations and groups, networking, volunteering, and journaling.
  • In the text box provided in the skills gap analysis file, include a summary of no more than 200 words describing the gaps you will work to reduce and the activities you will pursue to do so.
  • Submit your updated skills gap analysis to the submission folder located in the final step of this project.

Thank you,

Jennifer

ATTACHMENTS

Frank Marinara Contact Information

When you have completed Step 1, proceed to Step 2, where you will examine supply and demand.

Project 1: Applied Economics for Managers
Step 2: Analyze a Supply and Demand Graph

For the first assignment, Frank has given you data to analyze an illustrative supply and demand graph for the production of crude oil in the world. To analyze the graph, you will need to understand demand, supply, and equilibrium economics concepts. The graph is useful to know how prices are set for crude oil on a minute-by-minute basis in world commodity markets.

Frank has passed along some data he has gathered to help you analyze a supply and demand graph for the oil and gas industry. View Frank’s data and read the instructions on the Supply and Demand Graph worksheet of the Project 1 Excel Workbook, which you will access below. You will use different sheets from this workbook in the subsequent steps of this project.

To help you build a basic understanding, you must determine what economic model best describes the oil and gas industry. There are three basic economic models, and none fits the oil and gas industry perfectly. Is this industry in perfect competition? Is it an oligopoly? Or a monopoly? To make this determination, read about perfect competition, oligopoly, and monopoly. You should also read competition production and pricing decisions, monopoly production and pricing decisions, and price discrimination.

The key point in deciding on the economic model is the number of sellers. If there is only one seller, the industry is likely a monopoly. On the other hand, if there are five or fewer sellers, the industry is expected to be an oligopoly. Finally, if there are a dozen or more sellers, the industry is closer to perfect competition.

Here is an illustrated example of a supply and demand graph with the point of equilibrium:

A graph with Price per Pound on the y-axis and quantitiy in millions on the x-axis.Equilibrium Price of Coffee

When we combine the demand and supply curves for a good in a single graph, the point at which they intersect identifies the equilibrium price and equilibrium quantity. Here, the equilibrium price is $6 per pound. Consumers demand, and suppliers supply, 25 million pounds of coffee per month at this price.

Source: Demand, Supply, and Equilibrium is licensed under CC BY-NC-SA 4.0.

When you have finished this step during Week 1 of the course, post the Project 1 Excel Workbook to the submission folder located in the final step of this project.

When you have completed Step 2, proceed to Step 3, where you will examine costs, pricing, elasticity, and the production function.

Licenses and Attributions

Demand, Supply, and Equilibrium is licensed under CC BY-

Project 1: Applied Economics for Managers
Step 3: Analyze Cost, Pricing, Elasticity, and the Production Function

In your second week on the job, you’re beginning to realize the responsibilities and complexities of your job, and you’re glad to have analyzed the supply and demand graph you created. As you come into work, you see a voicemail from flashing on your office phone—it’s Frank:

Voicemail from Frank

“Good morning. I just wanted to say you really did a great job developing that supply and demand data. Now that you have some understanding of the industry, I would like you to apply the concepts of elasticity of demand and elasticity of supply.

“Exxon is concerned about a franchisee store in Fitzhugh, Maryland. The owner is having trouble maintaining profits while managing price changes. They’d like MCS to offer advice on price adjustments for that franchise to achieve maximum profit.

“I’ll provide with data that describes the gas station franchise operations and competition. You can find this data in the Profit Maximization worksheet of the Project 1 Excel Workbook you used in the last assignment (Step 2). Complete the tables in the worksheet and answer the client’s questions.

“The tables in the worksheet show the quantity and price of oil sold by the franchisee. First you will need to calculate the elasticity of supply; the total revenue, total cost and profits at several levels of price and gallons sold (demand). Economists point out that maximum profit is achieved when Marginal Cost equals Marginal Revenue. Hence, you will need to solve for:

To complete your calculations, it is important for you to understand average total cost, opportunity cost and the profit maximization formula.

“Please reach out if you have any questions. Thanks so much.”

Access the data and read the instructions within the Profit Maximization worksheet of the Project 1 Excel Workbook to complete this assignment. When you have finished answering the questions, post the workbook to the submission folder located in the final step of this project. Complete this task during Week 1.

Now that you have completed Step 3, proceed to Step 4, where you will discuss world oil price movements.

Project 1: Applied Economics for Managers
Step 4: Discuss World Oil Price Movements

The days are passing quickly now. Week 2 starts slow, but an email from Maryland Creative Solutions’ Managing Director, Elisa Izuki, changes the pace.

INBOX (1 NEW EMAIL)

From: Elisa Izuki, Managing Director

To: You and Frank Marinara, MCS Senior Partner Finance

Good afternoon,

I am requesting your attendance at the upcoming junior partner meeting. The primary objective of this meeting is to discuss the concerns held by ExxonMobil about world oil prices. Based on your analysis last week of the oil and gas industry’s economic model, I’d like you to contribute your insights to the project meeting. Looking forward to having a productive and informative working session.

Sincerely,

Elisa

Elisa Izuki Contact Information

This is a good moment for you, as you are the only employee in the meeting that is not at the executive level. This is your time to shine!

As the meeting approaches, Frank briefs you on the key points of discussion:

  • Exxon has been concerned about developments in the world supply of crude oil. Both Venezuela and Iran have very significant proven oil reserves. Both countries are under sanctions from the US to restrict or prevent them from selling oil.
  • To put things into perspective, the world production of crude oil is just over 100 million barrels per day. The U.S. produces about 12 million barrels and all of OPEC about 30 million barrels. As of early 2019, Venezuela produces just over 1 million barrels down from a peak of 6 million barrels. Iran also produces over 1 million barrels.
  • Both Venezuela and Iran need the “hard currency” that comes from the sale of crude oil and refined products.
  • Russia and China have the technology and expertise to help these countries expand their production and sale of oil. However, Russia relies on the sale of its own oil and gas as a main source of income and has an incentive to avoid the decline of oil prices when Venezuela increases production.
  • MCS has been tasked by ExxonMobil with looking at new research into the world price of oil. Find one current article about the price of crude oil and post it in the discussion. Discuss the likely price movements of oil over the next few weeks. What are the analyst’s main concerns? Please provide a link to any sources that you use.

Before you participate in the discussion activity, see MBA discussion guidelines.

When you have finished Step 4, proceed to Step 5, where you will present your recent findings from Steps 1 through 4 in an executive summary.

Project 1: Applied Economics for Managers
Step 5: Prepare Executive Summary

Your busy second week on the job isn’t over yet. After a busy morning of ad hoc team meetings, you’re greeted in your office with a phone call from Frank.

Phone Call from Frank

“Hi again. I’ve got news about our client.

“ExxonMobil is looking to send a report to all company franchised gasoline stations. I’m going to need an executive summary based on the analysis you’ve done for this client so far on Cal’s Exxon. Also, this executive summary, along with citations for any sources you use, should be about one page long.

“Thanks again!”

Post your executive summary in the submission folder located in the final step of this project.

When you have completed Step 5, proceed to Step 6, where you will submit all work for Project 1.

Project 1: Applied Economics for Managers
Step 6: Submit Your Work

Thank you for all your work with Maryland Creative Solutions. Take note of the recommended delivery dates in the table below:

Maryland Creative Solutions

Recommended Project Delivery

Submission week

Deliverable

File-naming protocol

Step 1

Week 1

Skills gap analysis

lastname_firstname_skills_gap_analysis.docx

Step 2

Week 1

Supply and demand graph worksheet

lastname_firstname_supply_and_demand graph.xlx

Step 3

Week 1

Profit maximization worksheet

lastname_firstname_profit maximization sheet.xlx

Step 4

Week 1

World oil prices discussion
Submit discussion post in the world oil prices discussion section in Step 4

Step 5

Week 1

Executive summary

  • lastname_firstname_executive summary.docx

User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

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Cal Overhaut operates an ExxonMobil gas station franchise in Fitzhugh, MD. The price of gasoline is volatile
and varies greatly from day to day. The price per gallon varies based on the seasonal blend of gasoline, which
is determined by clean-air requirements. Cal's pricing options are based on the desired profit margin.
Conventional Gasoline Regular Spot Prices can be found at
https://www.eia.gov/dnav/pet/hist/EER_EPMRU_PF4_Y35NY_DPGD.htm.
Cal recently raised the price of regular gas by 10 cent per gallon from $2.658 to $2.758, and his revenue
decreased and profit increased. Cal would like you to explain why that happened.
Cal competes with another gas station across the street that typically sells regular gas for 2 to 3 cents per
gallon less than his station. They are currently selling gasoline for $2.458 per gallon. Recently, regular
gasoline for delivery in New York harbor sold for $1.517 per gallon.
Cal tells you that his gas station has fixed operating costs of about $438 per day.
To the right are the components that determine the cost of a gallon of regular gasoline to Cal's business.
Answer the seven questions below. You are required to use Excel for all calculations.

1. Last week, Cal sold an average of 4,000 gallons per day at an average price of $2.658 per gallon. This week,
he raised the average price to $2.758 per gallon. His station is now selling an average of 3,600 gallons per
day. Fixed costs of operating the gas station are $438 per day.
What is the price elasticity of demand?2.658
Can the demand be characterized as price elastic, price inelastic, or neither?
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)

2. After seeing your analysis, Cal decides to lower the price of gas from $2.758 to $2.558 per gallon. Afte
change, the volume sold increased to 4,400 gallons per day. He asks you to measure his business gains or
losses as a result of this price change. Fixed costs are $438 per day.

What is the price elasticity of demand?
Can the demand be characterized as price elastic, price inelastic, or neither?
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)

By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)

3. After seeing the result (from question 2), Cal decides to lower his price once again from $2.558 to $2.458
per gallon. Once again, volume sold increases and settles at 4,800 gallons per day. He is worried that any
further price cut will cause the discount station across the street to also lower it price.
What is the price elasticity of demand?
Can the demand be characterized as price elastic, price inelastic, or neither?
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline? (Profit is revenue minus total cost.)

4. Cal's son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs
when marginal cost (MC) = marginal revenue (MR). Cal understands that his marginal cost is the same as his
variable cost, or $2.158 per gallon. Technically, marginal cost is the added cost from selling one more gallon.
Cal asks you for a chart to show how profits vary with sales volume, assuming that he sells an additional 400
gallons for each 10 cent decrease in price. Also, he wants to know by how much he can lower his price
without losing money.
Given that you know the price and quantity of gallons sold so far, and that Cal's cost per gallon is $2.158 per
gallon and his fixed cost is $438 per day, complete the table to the right.

5. Once you calculate total profit, what is the profit maximizing price? $2.908

6. Next calculate marginal revenue, knowing that it is the difference between the revenue at the price
shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price.
Calculate the marginal cost of selling zero point one (0.1) more gallon at each price. Prove that MC =
$0.2158
Complete the table to the right.

7. What advice can you give to Cal on setting prices to maximize profit?
Cal can use business intelligence to assist with setting prices to maximize profits. Business
intelligence comprises the strategies and technologies used by enterprises for the data analysis of
business information. BI technologies provide historical, current, and predictive views of business
operations.

business information. BI technologies provide historical, current, and predictive views of business
operations.

Select One
Price Elastic
Price Inelastic
Unit Price Elastic

gasoline is volatile
nd of gasoline, which
rofit margin.

and his revenue

r 2 to 3 cents per
, regular

Profit Maximization
Base price of unleaded regular delivered in New York harbor (January 27, 2020)
Added cost to Cal:
Maryland state gasoline tax (Effective July 1, 2018)
Federal gasoline tax
Distribution & Delivery
Advertising and Marketing to ExxonMobil
Additives
Total additions
Total cost per gallon

o Cal's business.

This week,
3,600 gallons per

per gallon. After this
business gains or

Answer question 1 below.
Quantity
Price
2.658
4000
3600
2.758
Average
Average
3800
2.708
% change
% change
-10%
4%

Elasticity of Demand
2.658

Elasticity: Price Elastic
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline?
$
160.00
Gallons
sold per
day
4000
3600

Price
$
$

2.658
2.758

Answer question 2 below.
Quantity
Price
2.758
3600
2.558
4400
Average
Average
4000
2.658
% change
% change
22.222%
-7.252%

Variable Cost
(cost per unit x
volume)
2.158 $
8,632.00
2.158 $
7,768.80

Revenue (price x gallons) Cost per Gallon
$
$

10,632.00 $
9,928.80 $

Elasticity of Demand
3.064

Elasticity: Price Elastic
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline?
$
(400.00)
Gallons
sold per
day
3600
4400

to $2.458
worried that any

$
$

Variable Cost
Price
Revenue (price x gallons) Cost per Gallon (cost per unit x
volume)
2.758 $
9,928.80 $
2.158 $
7,768.80
2.558 $
11,255.20 $
2.158 $
9,495.20

Answer question 3 below.
Quantity
Price
2.558
4400
4800
2.458
Average
Average
4600
2.508
% change
% change
9.091%
-3.909%

Elasticity of Demand
2.325

Elasticity: Price Elastic
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline?
$
(320.00)
Gallons
sold per
day
4400
4800

mization occurs
st is the same as his
ing one more gallon.

lls an additional 400
lower his price

gallon is $2.158 per

$
$

Variable Cost
Price
Revenue (price x gallons) Cost per Gallon (cost per unit x
volume)
2.558 $
11,255.20 $
2.158 $
9,495.20
2.458 $
11,798.40 $
2.158 $
10,358.40

Profit Maximization
Gallons
sold per
day
2400
2800
3000
3200
3600
4000
4400
4800
5200
5600
6000
6400
6800

Price
$
$
$
$
$
$
$
$
$
$
$
$
$

3.058
2.958
2.908
2.858
2.758
2.658
2.558
2.458
2.358
2.258
2.158
2.058
1.958

Revenue (price x gallons) Cost per Gallon
$
$
$
$
$
$
$
$
$
$
$
$
$

7,339.20
8,282.40
8,724.00
9,145.60
9,928.80
10,632.00
11,255.20
11,798.40
12,261.60
12,644.80
12,948.00
13,171.20
13,314.40

$
$
$
$
$
$
$
$
$
$
$
$
$

2.158
2.158
2.158
2.158
2.158
2.158
2.158
2.158
2.158
2.1...

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