MPE 781 Lecture Notes - Lecture 2: Absolute Advantage, Opportunity Cost, Comparative Advantage

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erinminnow452

8 Aug 2018

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Opportunity cost: the next best alternative that you are giving up. 1. gives you 50 k salary; 3. gives me 45k; and 2. gives you 3 million dollars. To work as an economist, the opportunity cost is the acting job, because the salary is very high and you are giving up 2. 5 million dollars in order to work as an economist. Slope = vertical rate/horizontal rate; and oc is the number of units you have to give up in order to produce the other units. The slope of the ppf curve is nothing but the rate of the slope: absolute vs. China and australia: china"s strength is production of labour intensive manufacture. Australia has the advantage of mining products like gas, coal, oil etc. Oc in producing labour intensive products, and australia has the lower oc of mining products. Lower oc means you can produce those goods at the least cost while giving up fewer best alternatives.

Related Questions

Read about the Medford Mug Company. After reading the narrative work through the following questions.

Construct an Income Statement for the year ended 2017 and calculate the new Presidentâs bonus for 2017. Hint: Use the Income Statement pictures for year ending 2016 as an example and show the full statement.

1. Calculate the value of the ending inventory of mugs at the end of 2017. Please show all your work.

2. Take all of the factors into account and evaluate the performance of the new President at the end of his first year.

3. Did the new President do as good a job and the numbers in part (1) suggest?

Medford Mug Company

The Medford Mug Company is an old-line maker of ceramic coffee mugs. It imprints company logos and other sayings on mugs for both commercial and wholesale markets. The firm has the capacity to produce 50 million mugs per year, but the recession has cut production and sales in the current year to 15 million mugs. The accompanying table shows the operating statement for 2016.

MEDFORD MUG COMPANY
Income Statement Year Ending 2016 ($ in Millions)
Sales (15 million @ $2)		$ 30.0
Less costs of goods sold
Variable cost (15 million @ $0.50)	(7.5)
Fixed cost	(20.0)	(27.5)
Gross margin		$ 2.5
Less selling and administration		(4.0)
Operating profit		$ (1.5)

At the end of 2016, there was no ending inventory of finished goods.

The board of directors is very concerned about the $1.5 million operating loss. It hires an outside consultant who reports back that the firm suffers from two problems. First, the president of the company receives a fixed salary, and because she owns no stock, she has very little incentive to worry about company profits. The second problem is that the company has not aggressively marketed its product and has not kept up with changing markets. The current president is 64, and the board of directors makes her an offer to retire one year early so that they can hire a new president to turn the firm around. The current president accepts the offer to retire, and the board immediately hires a new president with a proven track record as a turnaround specialist.

The new president is hired with an employment contract that pays a fixed wage of $50,000 a year plus 15 percent of the firmâs operating profits (if any). Operating profits are calculated using absorption costing. In 2017, the new president doubles the selling and administration budget to $8 million (which includes the presidentâs salary of $50,000). He designs a new line of âpolitically correctâ sayings to imprint on the mugs and expands inventory and the number of distributors handling the mugs. Production is increased to 45 million mugs, and sales climb to 18 million mugs at $2 each. Variable costs per mug remain at $.50 and fixed costs at $20 million in 2017.

At the end of 2017, the president meets with the board of directors and announces he has accepted another job. He believes he has successfully gotten Medford Mug back on track and thanks the board for giving him the opportunity. His new job is helping to turn around another struggling company.

#1 (5pts, 1pt each) [circle all that apply, there may be more than one correct answer] The monthly payment of rent in the amount of $800 is a:

a) Fixed cost

b) Variable cost

c) Sunk cost

d) Recurring cost

e) Life-cycle cost

Engineering economic analysis is appropriate when:

a) The amount of money involved is significant

b) The situation is too complex for simple âback of envelopâ calculations

c) Social and environmental impacts are the most significant considerations

d) The problem is economic in nature

e) Quantifying political goals

After a new product or process is put in place the production cost per unit tends to _______as manufacturing methodology improves over time. This is known as the _______.

a) Increase, Ramp up effect

b) Decrease, Start-up effect

c) Decrease, Learning curve

d) Be flat, Opportunity cost

e) Vary widely, Chaos effect

Why is $100 today worth more than a rock solid guarantee to receive $100 in 10 years?

a) Inflation may erode the purchasing power of the $100
b) If you have the money you could put it to use
c) If you have the money you could invest it and collect interest
d) There is always some risk that the future payment may not happen
e) No telling what your circumstances might be in 10 years, i.e. you may not be around

Which of the following activities could be categorized as backward planning?

a) Figuring that you will need $1000 by June 1st to go on vacation and determining how many extra hours you need to work over the next few months.

b) Saving 10% of your salary.

c) Planning a drive that will hit the least amount of traffic, allow you to stop for dinner, and make it to a meeting in Austin by 7pm.

d) Renewing the lease on your apartment because a discount was offered.
e) Focusing on alternate activities while you are waiting for a supplier to provide a quote.

#2 (5 pts) Below is a plot of total cost and revenue versus the quantity made and sold. Fill in the correct answers.

What is the fixed cost? ____________
At what volume will the project break even? ___________
What is the profit (or loss) if 100 units are produced and sold? __________
What is the price charged per unit? ___________
What is the incremental total cost between producing 50 units and producing 100 units? _________

#3 (10 pts) A certain index for the cost of purchasing and installing utility boilers is keyed to 1988, where its baseline value was arbitrarily set at 100. Company XYZ installed a 50,000-lb/hour boiler for $525,000 in 2010 when the index had a value of 468. This same company must install a boiler of the same size in 2017. The index in 2017 is 542. What is the approximate cost of the new boiler?

#4 (10pts) Draw the cash flow diagram reflecting the following car ownership. Please draw neatly with the length of the arrows corresponding to the magnitude of the amounts (but not necessarily fully to scale). Label the amounts different from the standard monthly payments.You purchase the car at time zero for $2000 down plus 24 monthly payments of $200. In month 4 you have an unexpected repair bill of $250. In month 18 you have to purchase new tires for $400. At 30 months you are offered $700 for the car and happily sell it.

Question 2

Puspasumi Developer Bhd, a major construction company, plannedto do a big construction project which should be started next year.The objective of the project is to develop the company to enter inthe multi-million company list.

For that purpose, two years ago Puspasumi conducted a marketresearch to investigate the potential projects in order to achievethe companyâs objective and now the Directors came out with detailsof two different construction projects;

Project A: Triangle Luxury Residence

Triangle Luxury Residence is a residential apartment which restson 20 acres of prime land on the hotspot of Shah Alam.

This freehold project is expected will be launched in January2013 and is scheduled for completion in 4 years time in December2016.

The Triangle features a comprehensive mix of residential housewith built-up area 1,000 sq ft and 1,667 sq ft. There will be 500units of 1,000 sq ft apartments and 300 units of 1,667 sq ftapartments.

List price for 1,000 sq ft apartment is RM400,000 and for 1,667sq ft apartment is RM1,000,000.

Details on the expected cash flows for per year of this projectare given below:

Initial capital which needed in 2013 to start the project isRM20 million for land, RM11 million to develop the land forconstruction work, RM5 million for labour cost, RM50 million formaterials and RM1 million for other expenses (includingadvertisement).

The labour cost, material cost and other expenses for 2014, 2015and 2016 will be RM7 million, RM35 million and RM1.5respectively.

JUNE 23, 2016 [ EXECUTIVE MASTER]

Total units of apartment which expected to sell according to theyear are given below:

Year	1,000 sq ft apartments	1,667 sq ft apartments
2013	200	150
2014	200	100
2015	50	50
2016	50	50

Project B: Puchong Gardens â Haven of Luxury

Puchong Gardens is a guarded garden community which will belocated in Bukit Puchong, Puchong with landscaped 30 acre, and themost luxurious residential development.

This freehold project is expected will be launched in 2013 andis scheduled for completion in 5 years time.

The Gardens area range between 8,300 sq ft and 12,000 sq ft,which will be carefully tailored to individual preference and needsof home purchasers. There is also a choice of four distinctivearchitectural designs that will be bear flower-inspired names inline with the garden theme: Amaryllis, Bloomeria, Carlina andDellanis. The will be 60 units of 8,300 sq ft bungalows and 40units of 12,000 sq ft bungalows.

List price for 8,300 sq ft apartment is RM4,000,000 and for12,000 sq ft apartment is RM8,000,000.

Details on the expected cash flows for per year of this projectare given below:

Initial capital which needed in 2013 to start the project isRM50 million for land, RM20 million to develop the land forconstruction work, RM8 million for labour cost, RM70 million formaterials and RM1 million for other expenses (includingadvertisement).

The labour cost, material cost and other expenses for 2014,2015, 2016 and 2017 will be RM30 million, RM25 million and RM1.5respectively.

JUNE 23, 2016 [ EXECUTIVE MASTER]

f. Total units ofapartment which expected to sell according to the year are givenbelow:

Year	8,300 sq ft bungalows	12,000 sq ft bungalows
2013	20	10
2014	10	10
2015	10	10
2016	10	5
2017	10	5

All the costs and revenue from the projects expected will betake place at the end of each year. The cost of capital is 12%.

In order to add value for the company, the directors requestedtheir financial departments to select the best project to implementin 2013. Therefore, as a financial manager of the company you arerequest to evaluate the both projects with using Net Present Valuemethod and do a report of your evaluation which shouldincludes:

NPV calculation for each project.

Selection of the best project (must include the explanation ofthe reasons of selection).

Comments or critiques of the selected project (can include thecomparison of methods or projects, other related factors)

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MPE 781 Lecture Notes - Lecture 2: Absolute Advantage, Opportunity Cost, Comparative Advantage

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