Question

The government has decided to nationalize it's sawmill industry. you have been asked to manage the new portfolio. according to your information, sawmills processed one million board feet of 2x4s from government owned woodlots last year. the average price of the wood was $400 per thousand board feet. owners of private woodlots have offered to sell the government owned sawmills 300,000 board feet of 2x4s at $350 per thousand board feet. if the government buys the 300,000 board feet from private sources, it will only have capacity to harvest 700,000 from its own woodlots. in that case , the average cost of the government wood will rise to $425 per thousand board feet.

should the government buy 300,000 board feet from private sources, or should it continue to source all of its needs from government owned woodlots? Show your calculations and state what other factors should be considered.

Answer 1

CASE 1:- if the government buys 300000 board feet from the private sources, cost of the government shall be:-

300000 board feet from the private sources=(350/1000)*300000=105000

700000 board feet own produced =(450/1000)*700000=315000

total cost shall be = 420000

CASE 2:- if the government harvest 1000000 board feet self:-

(400/1000)*1000000=400000

conclusion:- the government should meet all its needs from owned woodlots because there is a savings of $20000 in this decision.

other factors like volume of production ,utilization of production capacity, manpower, fixed costs is taken into consideration.

if volume of production is high it is better to make the product to achieve economies of scale.

if we have large production it is recommended to make the product.

availability of skilled manpower makes production decision favourable.