Homework SoursePacific Woodworks Inc has an inventory of a very unique wood
| Pacific Woodworks, Inc. has an inventory of a very unique wood that was purchased for $10,000 five years ago. Currently the market value of this wood is $23,000. The production department has proposed to use this wood for making 1,000 statuettes and sell them for $20 each. All other expenses for making one statuette is $6 per statuette not including the cost of wood. |
| Question: |
| Is the proposal economically viable? |
| Please explain your answer. |
| Pacific Woodworks, Inc. has an inventory of a very unique wood that was purchased for $10,000 five years ago. Currently the market value of this wood is $23,000. The production department has proposed to use this wood for making 1,000 statuettes and sell them for $20 each. All other expenses for making one statuette is $6 per statuette not including the cost of wood. |
| Question: |
| Is the proposal economically viable? |
| Please explain your answer. |
Solution
Wood was purchased for 10,000 $ which is fixed cost
Current market value= 23000$
If it makes statuettes, Total revenue=1000(20)=20000 $
Total cost=variable cost+fixed cost
=6(1000)+10,000=16000 $
Profit=20000-16000=4000 $
If it does not make statuettes, it can sell it directly in market for 23000 $ and can earn
23000-10000=13000 $
Since 13000 >4000, so proposal is not economically viable.
