The situations of business at Bakery - Fresh ‘n’ Tasty were presented to show that; 1. There was a loss or accounting profit was negative and business was put to an end. 2. There was profit in the sense of accounting profit, but, loss in an economic sense, when opportunity cost of the labour resource was taken in to consideration. Hence business was discontinued. 3. Accounting profit is a precondition to economic profit. When there is a positive accounting profit and economic profit, business gets continued.4. The case indirectly also focuses upon the concepts of break-even point or cost-volumeprofit analysis of a business which helps to decide whether to continue or shut down. It can be discussed through a holistic approach with the concepts of economics, accounting and costing.
In other words, firms or businesses just do not look for an accounting profit, but economic profit, as the resources they own have an opportunity cost. Nanjundappa sold the Bakery, as there was a loss or as accounting profit was negative. Kemmick& Friends had accounting profit. But, after they got a job with around Rs. 30,000 salary a month, though there was accounting profit, economic profit was negative, because of their opportunity cost, i.e., employment in a software company. When expected growth of salary from software profession is more than the expected growth of revenue from Bakery, the decision to take up software employment, over continuing with Bakery, becomes inevitable due to expected loss in terms of economic profit from Bakery. Manjunath, has accounting profit and as he and his family members being less educated and lack skills for other jobs have a low opportunity cost and were able to attain economic profit too. Hence, he continued the business.
Courses to which the Case is Suitable
The case is developed to discuss the concepts of Accounting Profit, Economic Profit, Implicit Cost, Explicit Cost and Opportunity Cost, as part of Microeconomics or Managerial Economics or Business Economics. In addition to post graduate students of Management and Economics, it can also be used for students pursuing under graduate course in Law, Management, Commerce and Economics.