Question

Ski Boards, Inc., wants to enter the market quickly with a new finish on its ski boards. It has three choices: (a) Refurbish the old equipment at a cost of $800, (b) make major modifications at a cost of $1,100, or (c) purchase new equipment at a net cost of $1,800. If the firm chooses to refurbish the equipment, materials and labor will be $1.10 per board. If it chooses to make modifications, materials and labor will be $0.70 per board. If it buys new equipment, variable costs are estimated to be $0.40 per board. Which alternative should Ski Boards, Inc., should choose if it thinks it can sell 700 boards?

Answer 1

Answer:

Alternative A= $1570

Explanation:

Giving the following information:

It has three choices:

(a) Refurbish the old equipment for $800.

Materials and labor= $1.10 per board.

(b) make major modifications for $1,100

Materials and labor= $0.70.

(c) purchase new equipment at a net cost of $1,800.

Variable costs= $0.40.

Q= 700

Alternative A= 800+1.10*700= $1570

Alternative B= 1100+0.70*700= $1590

Alternative C= 1800+0.40*700= $2080

The cheapest alternative is Alternative A. To make a full analysis you need the selling price, which we don't have.  

Answer 2

The Ski Boards, Inc. should choose alternative A if it thinks it can sell 700 boards because alternative A gave the net cost of $1,570 among the other two alternatives by applying the concept of opportunity cost.

What does the opportunity cost?

It is the cost of the next best alternative which can be chosen between the given alternatives. The alternatives can be chosen in such a way that it would give the maximum benefit.

Here, ski boards should choose alternative A because Alternative A gave the minimum cost.

Calculation of cost of the 3 alternatives:

According to the given question,

The company has three alternatives:

Alternative (A):

Renovate the old equipment for $800 with the materials and labor cost of $1.10 per board and give the total cost for producing 700 units is:

$\ 800+(1.10\times700)= \ 1,570$

Alternative (B):

Make major modifications for $1,100 with the cost of Materials and labor $0.70 per board and gives the total cost of producing 700 units is:

$\ 1,100+(0.70\times700)= 1,590$

Alternative (C):

Purchase new equipment at a net cost of $1,800 with the variable costs of $0.40 per board and gives the total cost of producing 700 units is:

$\ 1,800+(0.40\times700)= \ 2,080$

Therefore, The cheapest alternative is Alternative A. so Ski Boards, Inc. should choose alternative A.

Learn more about opportunity cost, refer to:

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