Question

"Pemberley Marine Ltd has a boat that it acquired some months ago at a cost of £​8,000. The boat needs a replacement engine before it can be used. It is possible to buy a new engine for £​6,000. This would take eight hours to fit by a technician who is paid £16 an hour. At present the business is very busy and the technician could work on other boats. The normal charge-out rate for the technician is £80 per hour. Without the new​ engine, the boat could be sold for an estimated £​9,500.

What is the minimum price at which the business should sell the boat with a new engine​ fitted?"

Options:

a) £13,680
b) £14,800
c) £15,120
d) £16,000

Answer 1

To determine the minimum price at which the business should sell the boat with a new engine, we need to calculate the cost of the new engine and the opportunity cost of the technician's time. The minimum price is £16,140. The closest option is £16,000 (option d).

Step-by-step explanation:

To determine the minimum price at which the business should sell the boat with a new engine, we need to calculate the cost of the new engine and the opportunity cost of the technician's time. The cost of the new engine is £6,000. The technician's time to fit the engine is 8 hours, so the cost of labor is 8 hours x £16 per hour = £128. However, if the technician were to work on other boats, the business could charge out 8 hours x £80 per hour = £640. Therefore, the opportunity cost of the technician's time is £640 - £128 = £512.

Without the new engine, the boat could be sold for £9,500. So, the minimum price at which the business should sell the boat with a new engine fitted is the sum of the cost of the new engine (£6,000), the cost of labor (£128), and the opportunity cost of the technician's time (£512), plus the estimated sale price without the new engine (£9,500): £6,000 + £128 + £512 + £9,500 = £16,140.

Based on the options provided, the closest minimum price is

£16,000 (option d)