Question

Please answer and explain all parts to the question

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

Answer 1

0 < ?? < ?? < ??	Accounting Costs	Economic Costs	Accounting Costs Explanation	Economic Costs Explanation
i. Past purchase of a metal pole for inventory.	pm	pm (sunk costs)	Cash outflow is accounting cost	Includes implicit costs over and above explicit accounting costs for economically efficient decision making.
ii. Current purchase of a fiberglass pole for inventory.	pf	pf (sunk cost) pm(opportunity cost)	Cash outflow is accounting cost
iii. Keeping a fiberglass pole in inventory.	-	pf (sunk cost) pm(opportunity cost)	No cash inflow or outflow
iv. Keeping a metal pole in inventory.	-	pm(sunk cost)                            ps (opportunity costs)	No cash inflow or outflow
v. Selling an uninstalled metal pole for scrap	(-)ps	pm(sunk cost)	Cash inflow is negative accounting cost