Question

Exmouth Marine Engineers Ltd owns a cruiser yacht that is in need of repair. The cruiser yacht was taken in lieu of payment for an unpaid bill for​ £3,400. The company is working to full capacity but is considering refurbishing the yacht for resale. Workers who are paid​ £10 per hour will carry out the refurbishment and it is estimated that 100 hours of work is required. The normal labour charge for customers is​ £20 per hour. The company believes that the cruiser yacht could be sold for​ £3,100 in its current condition. Materials costing​ £500 would be required to carry out the refurbishment. These materials are currently in inventories as they are frequently used by the business.

What is the minimum resale price that the business would have to charge to justify the​ refurbishment?
A. £​6,100
B. £​5,600
C. £​5,100
D. £​4,600

Answer 1

The minimum resale price needed to justify refurbishing the cruiser yacht, when including the current value of £3,100, labor costs of £1,000, and materials cost of £500, is £4,600. This aligns with option D as the correct answer.

Step-by-step explanation:

The minimum resale price that Exmouth Marine Engineers Ltd would have to charge to justify the refurbishment of the cruiser yacht can be calculated by considering the costs associated with the refurbishment, the current value of the yacht in its present condition, and the opportunity cost of the labor.

To calculate this price, first consider the value of the yacht in its current condition, which is £3,100. Next, add the cost of labor, which is 100 hours times the internal cost of £10 per hour, totaling £1,000. It should be noted that even though the standard labor charge is £20 per hour, since the workers are already on payroll, their actual cost to the company is their wage of £10 per hour, which is the relevant cost for this calculation.

Additionally, materials costing £500 will be used, which are already in inventory. However, these materials could alternatively be used for other projects or sold, so this cost must also be included. After adding the current value of the yacht (£3,100), labor costs (£1,000), and the materials (£500), the total cost amounts to £4,600.

Therefore, to justify the refurbishment, the business needs to sell the yacht for more than £4,600. The minimum resale price aligns with option D, which is £4,600.