Question

Suppose a small lumber company operates in Washington State. The production process in this case involves chopping down and processing trees that grow deep in forests throughout the state. The company currently owns 160 axes. Each axe lasts two seasons, meaning the company must replace half of its axes each year. The company owns no other capital goods, and uses no other materials. Since each axe can only be used by one worker, the company hires 160 workers. Each worker works 200 hours during the season, and produces 5 boards per hour. Each axe costs $800, the hourly wage is $15, and lumber currently sells for $3.85 per board. Assume that all output is sold.  Calculate the following:

1) total wages and benefit

2)total sales revenue

3)total cost of depreciation and replacement

4)capital goods owned

5)total profit

6)net output

7)the profit rate

8) Suppose now that each axe only lasts one season, meaning the company must replace all of its axes each year. Calculate the new profit rate that would result.

Instructions: Be sure to enter your answer as a percentage. Round your answer to two decimal places.

Answer 1

1) total wages and benefit

No. of workers hired	160	workers
Total working hours @ 200	32000	hours
Total wages paid @ $15 per hour	480000	$

2)total sales revenue

Production per working hour	5	boards
Total production	160000	boards
Total sales revenue @ $3.85 per board	616000	$

3)total cost of depreciation and replacement

No. of axes replaced each year	80	units
Axes Cost @800 per piece	64000	$

4)capital goods owned = Axes


5)total profit = $72000

	No. of axes replaced each year	80	units
A	Axes Cost @800 per piece	64000	$
	No. of workers hired	160	workers
	Total working hours @ 200	32000	hours
B	Total wages paid @ $15 per hour	480000	$
	Production per working hour	5	boards
	Total production	160000	boards
C	Total revenue @ $3.85 per board	616000	$
	Total Profit = C - B - A	72000	$

6)net output = 160000 boards

Production per working hour	5	boards
Total working hours @ 200	32000	hours
Total production	160000	boards

7) the profit rate= 11.69%

C	Total revenue @ $3.85 per board	616000	$
D	Total Profit = C - B - A	72000	$
	Profit rate per board (D / 160000)	0.45	$
	Profit rate % to Total revenue (D/C*100)	11.69%

8. If all axes need to be replaced every year: 1.30%

	No. of axes replaced each year	160	units
A	Axes Cost @800 per piece	128000	$
	No. of workers hired	160	workers
	Total working hours @ 200	32000	hours
B	Total wages paid @ $15 per hour	480000	$
	Production per working hour	5	boards
	Total working hours @ 200	32000	hours
	Total production	160000	boards
C	Total revenue @ $3.85 per board	616000	$
D	Total Profit = C - B - A	8000	$
	Profit rate per board (D / 160000)	0.05	$
	Profit rate % to Total revenue (D/C*100)	1.30%