Answer to Question #143880 in Finance for Mr. Dinesh Pal Singh

Question

7. Tempo Electronics, Inc., has an inventory of 5,000 unique electronic chip originally purchased at $2.50 each; their market value is now $ 5 each. The production department has proposed to use these by putting each one together with $6 worth of labor and other materials to produce a wristwatch that would be sold for $10. Should that proposal be implemented? Explain from the viewpoints of economic profit and opportunity costs.

Answer 1

Option one

sell 5000 chips at $\$5= 5\times5000=\$25,000$

cost to Tempo Electronics =$2.50\times5000=\$12,500$

$profit = 25,000- 12,500 = \$12,500$

option two

sell 5000 units at $\$10 =10\times5000 = \$50,000$

cost of manufacture ($6.0 + 2.50 = 8.50) = 5000\times8.50 = \$42,500$

$profit = 50,000-42,500 = \$7,500$

As profit is greater when sold, so option one is more profitable and should be followed by the firm.