Question

The High-Rise Building Company (HRBC) uses 416,160 tons of stone per year. The carrying costs are $100/ton. The cost per order is $500. Calculate the optimal carrying costs. (Assume a linear usage rate and that HRBC runs its inventory down close to zero as the replenishment order arrives.)

Multiple Choice
a. $204,000
b. $102,000
c. $77,000
d. $52,000

Answer 1

Initially, the best production method based on the costs of labor ($100/unit) and capital ($400/unit) is Method 1, with a total cost of $9,000. When the cost of labor increases to $200/unit, Method 1 still remains the best method, now with a total cost of $14,000.

Step-by-step explanation:

The question revolves around finding the best production method based on the costs of labor and capital. With the given data, we can calculate the total cost for each method by multiplying the units of labor and capital by their respective costs. Initially, with labor at $100/unit and capital at $400/unit:

• Method 1: (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $5,000 + $4,000 = $9,000
• Method 2: (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $2,000 + $16,000 = $18,000
• Method 3: (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $1,000 + $28,000 = $29,000

When the cost of labor rises to $200/unit:

• Method 1: (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $10,000 + $4,000 = $14,000
• Method 2: (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $4,000 + $16,000 = $20,000
• Method 3: (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $2,000 + $28,000 = $30,000

The best production method initially is Method 1, with the lowest cost of $9,000. However, if the cost of labor increases to $200/unit, Method 1 remains the best production method with the total cost of $14,000.