Zane's Vanes is a service that restores old weather vanes. Zane has just spent $125 purchasing a 1920s-era weather vane which he expects to restore and sell for $500 once the work is completed. After buying the weather vane, Zane realizes that he will need to spend an additional $200 on materials to complete the restoration. Alternatively, he can sell the weather vane without restoring it for $200. Assume all costs include Zane's opportunity cost. What should he do?
It does not matter what he does; he is going to take a loss on the project.
He should sell the weather vane now to make the most profit.
He should sell the weather vane back to the party he purchased it from and cut his losses.
He should finish the restoration and then sell the weather vane.
Answer
Option d) is correct. He should finish the restoration and then sell the weather vane.
Reason: If he will restore the weather vane, his total cost would be $125 + $200 = $325. However, he will earn a total of $500 on selling the restored weather vane. Thus, hus profits would be $500 - $325 = $175
On the other hand, if he does not restore the weather vane and sells it for $200, his profit would be $200 - $125 = $75.
Since he is earning more profit by restoring the weather vane, he should definitely restore it before selling.
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