Teaching Resource: Types of Cost

The following set of questions outline how Breaking Bad can be used to assess content knowledge based on AACSB. We have provided several multiple-choice questions and a written assignment, along with possible responses and an accompanying rubric. As per Bloom’s taxonomy, these assess reasoning skills such as knowledge, comprehension, application, and analysis.

Episode Title: Owner’s Not Employees
Season: 5
Episode: 3
Episode Title: “Hazard Pay”
Timeframe: 38:41 — 42:34
Concepts: accounting, black markets, compensating differential, dispute resolution, fixed costs, fixed inputs, gross domestic product, institutions, judicial system, money laundering, profit, property rights, revenue, risk premium, total costs, transaction costs, underground economy, variable costs, variable inputs

Bloom’s: Analyze/AACSB: Analytic

In this clip, Mike, Walter, and Jesse split the proceeds from their new methamphetamine-producing enterprise. Describe the division of their revenue in terms of costs and profits. When formulating your answer:

1. explain the difference between variable costs and fixed costs
2. identify at least two examples of each
3. calculate the total profits for the three partners
4. identify the profit type by explaining the difference between economic profits and accounting profits; and
5. suggest a situation in which the accounting profits are higher than the economic profits

POSSIBLE RESPONSE:
The clip shows a process that appears frequently on the calendar of every business: separating the costs from total revenue to retrieve the profit. It is also important to distinguish between variable and fixed costs. Unlike fixed costs, variable costs fluctuate with the size of output; in this case, the amount of methamphetamine produced. For example, expenditures with the “mules” (transportation services) and methylamine (a key input) are variable. The larger the output, the larger the total revenue and, hence, the cost with the “mules”, which represents 20% of the revenue. Also, the larger the output, the larger the amount of methylamine needed and, hence, the higher the cost with this input. Fixed costs do not vary with the amount of output (at least in the short run). The expenses with Jesse’s loan, Ira and his people, and the lawyer (i.e., Saul Goodman), are examples of fixed costs. The total profit is found by subtracting the total (variable and fixed) costs from the total revenue. Specifically, this represents an accounting profit of $411,000 (or $137,000 for each Mike, Walter, and Jesse). Since no information about the opportunity cost of being in the methamphetamine business is presented, one cannot tell much about the economic profit. As long as the opportunity cost of manufacturing is positive, the economic profit is less than $411,000. Accounting profit is always larger than the economic profit because it does not take into account the opportunity cost of production/being in business.

Bloom’s:Analyze/AACSB: Analytic

The cost with the mules/transportation is fixed and represents twenty percent of total revenue.

1. True
2. False

Bloom’s: Remember/AACSB: Reflective Thinking

Which of the individuals/categories/items shown below represent a variable cost?

1. Mules/transportation
2. Ira and his guys
3. Lawyer
4. Methylamine
5. A and D, only

Bloom’s: Analyze/AACSB: Analytic

Based on the conversation between Mike and Walter, what must be factored into the calculation of the opportunity cost of killing Gus Fring?

1. Twenty percent of the revenue generated by each cook session
2. The distribution network, which Gus Fring created
3. The sixteen trucks, which are currently in government impound
4. All of the above
5. A and B, only

Bloom’s: Analyze/AACSB: Analytic

What is the total profit generated through the manufacturing and sale of methamphetamine?

1. $137,000
2. $367,000
3. $411,000
4. $1,101,000

Bloom’s: Apply/AACSB: Analytic

Using the total revenue emphasized by Walter, the cost with the mules/transportation is:

1. $275,000
2. $278,560
3. $300,000
4. $367,000