Question

Consider cost theory.

Suppose an electricity distribution firm purchases a number of metal poles for inventory at a price of ?? per pole. Sometime later, metal poles become obsolete in the industry in favour of fiberglass poles, and command a price of ?? per pole in the scrap metal market. By the time the firm switches to fiberglass poles, some of the metal poles previously purchased remain in the firm’s inventory. The price of a fiberglass pole is ??. Assume that 0 < ?? < ?? < ??. In terms of these variables, quantify the accounting and economic costs of each of the following activities:

i. Past purchase of a metal pole for inventory.

ii. Current purchase of a fiberglass pole for inventory.

iii. Keeping a fiberglass pole in inventory.

iv. Keeping a metal pole in inventory.

v. Selling an uninstalled metal pole for scrap. Briefly explain which of the quantified costs are sunk.

Briefly explain which of the quantified costs are sunk.

Answer 1

Here we assume that's 0 < ps < pm < pf

i) Past purchase of a metal pole for inventory.

Ans:- When electric distribution firm purchase a number of pole for their inventory that's are to be used in the their operation with out using that's metal pole are sunk cost because metal pole occupies space in the inventory. The cost of storing and maintaing of inventory are called inventory cost. so firm have to used their maximum number of metal pole for operation to save inventory cost and also sunk cost. This is not sunk cost until they dont use in their operation.

ii) Current purchase fiberglass pole for inventory.

Ans:- Electric distribution firm purchase fiberglass pole for inventory so firm have to replace thats number of metal pole to fiberglass pole because when firm purchase fiberglass pole so they dont get same amount of money or after some time new technology are develope in pole so fiberglass pole value are goes to down thats time firm wont get same amount of money or get some scrap value of pole. This is not sunk cost until they dont use in their operation.

iii) Keeping fiberglass pole in inventory.

Ans:- By keeping fiberglass pole in inventory firm increased their inventory cost and after technology upgration thats fiberglass pole value are goes down so this is sunk cost until they use in their operation.

iv) Keeping metal pole in inventory.

Ans:- By keeping metal pole in inventory firm increased their inventroy cost and after fiberglass pole taking place in metal pole so this is sunk cost until they sell at scrap value.

v) Selling unistalled metal pole for scrap

Ans:- By selling metal pole at scrap value firm save inventroy cost and making new space for fiberglass pole so this is not sunk cost.