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MGSC30H3 Study Guide - Final Guide: The Seller, Philippe Suchard, Thermostat

Management (MGS)
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Management C31
Winter Term, 2006
Final Examination
Katie and Sally love to bake cookies. As recent graduates of the management program at
UTSC, they are convinced that they can turn their passion into dollars. They incorporate
a corporation, “Cookies for Everyone Inc.” (“CE”). They then decide to open a cookie
restaurant, where customers can purchase their gourmet cookies and enjoy them with a
nice glass of milk. They locate their new restaurant in an upscale mall, right beside a
daycare centre. They are sure the delicious smell of their cookies will attract patrons
young and old.
CE needs some equipment to produce cookies on a commercial scale. First, they buy a
mixer for the cookie dough. They find a very nice used mixer for sale for $5,000. Katie
notes that it needs some work, and offers the seller $4,000. The seller refuses that offer,
but suggests that he would take less than the asking price. Katie sends the seller an e-
mail offering $4,500. The seller does not respond. Katie phones up and inquires about
her offer; the seller says he needs more, so Katie offers $4,575, thinking that might be
enough. The seller agrees on the phone to that price. When Katie goes to pick up the
machine, however, the invoice says $4,755. The seller is not around, and the clerk insists
that was the price quoted. Katie wants the machine immediately, and also needs some
further parts from the seller. So Katie pays the $4755, saying to the clerk that she would
be back to get some other parts for the difference, once she sorts the whole thing out with
the seller. The seller, however, insists that $4,755 was the price they agreed on, and will
not give Katie other parts without extra payment.
Outfitting a restaurant is expensive, and Katie and Sally go to the bank to get some much-
needed financing. The bank manager is very helpful. She is glad to loan money to CE,
and is prepared to set up a loan for $50,000 to help CE get started. She does, however,
require that Katie and Sally sign a lot of paper. She puts each piece of paper in front of
each of them, and quickly says, “Just sign this.” When Sally asks what each piece is for,
the manager says, It is part of the loan package for the company. It is all just standard
form. I’m not sure what it all does either, but head office needs it for the loan.” The
documents have strange titles such as “Intent to Grant Security”, Revolving Credit
Facility Provision Application” and “Personal Guarantee.” Sally says, “I really wish I
knew what all this was,” but the bank manager just says “It is all required for the loan.”
So Katie and Sally sign everything.
Katie then needed to secure a source of raw materials for the cookies. Flour is the main
ingredient in cookies, so Katie wanted to ensure they had a good supply of flour. She
began to negotiate a long-term supply contract with the OK Flour Supply Inc. The
contract called for delivery of 20 bags of flour each month for 5 years, at a price of $80 a
bag. Since the price of flour fluctuates, there was a clause in the contract that allowed the
supplier to raise the price each year, but no more than 5% a year.
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Katie and Sally are especially proud of their chocolate chip oatmeal cookies. They use
only the very finest chocolate chips in them. The chips have such a high chocolate
content that they melt as the cookie is baked, leaving a delicious soft pockets of chocolate
where each chip began. Katie has a contract with the chocolate supplier for a particular
brand of chip supplied by Suchard of Switzerland. The contract specifies that particular
brand is the only one that CE will accept.
Katie and Sally then start baking away, and the restaurant is jammed with happy
customers munching cookies. Everything is going well for the first six months. Then
there are some problems. First, the bake oven that CE purchased begins to act up. If
Katie and Sally put one sheet of cookies in the oven, everything is fine. But if they put a
second sheet of cookies in the oven at the same time, the oven heats up quickly and the
cookies often burn. When Katie investigates, she finds out that the thermostat that
controls the oven temperature is defective. She has that replaced, but it does not fix the
problem. Finally she has another repairman come in. He tells Katie that the design of the
oven is at fault, and that the oven will never work properly. The oven cost $1,500, but
when Katie goes to purchase a new one, she finds she cannot buy anything comparable
for less than $2,500. She wonders what to do.
At this point, CE has problems with the flour. It seems that the price of flour has almost
doubled, due to an invasion of weevils in Saskatchewan. The supplier has threatened to
cut off supply. After talking with the supplier, Sally says she will pay half of the
increase, or $120 a bag if the supplier will keep supplying the flour. The supplier keeps
sending bags of flour, and Sally pays the extra amount for 3 months. But the extra
expense is hurting CE badly, and Sally would really like to insist on the original contract
Then the chocolate becomes a problem. The chocolate supplier has been sending the
chocolate chips that Katie wanted, but the latest shipment is all wrong. The chips remain
as hard little waxy chunks and have no taste. It seems that Suchard has changed it recipe
and lowered the chocolate content in its chips. These chips are actually now worse in
quality than chips available at half the price. Katie would like to have chips supplied
from another source of supply, but the chocolate supplier insists on the original terms.
The supplier has laid in 4 month’s supply from Suchard, and has no other customers for
One day, Katie comes in to discover that her cookie recipies are all over the floor of the
office, over by the copy machine. A short time later, another cookie bakery opens in the
mall just opposite CE. People flock to it, because it is cheaper but the cookies seem to be
just as good. When Katie and Sally buy a few, they are convinced that the cookies are
the same recipies. When they seek out the owner of the new cookie bakery, they find out
that he has employed the very same person as a former employee of CE, who came in to
work on weekends so Katie and Sally could go home once in a while. The new owner
just says “A cookie recipe is common property. Good luck.” Katie and Sally are sure the
former employee has stolen the recipes, and wonder if there is anything they can do about
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