Question

Harry Ball, a sole proprietor, owns two warehouses in Klang. One he leases out for $80,000 pa (paid at the beginning of each year) and in the other he assembles imported red and white wheelbarrows. He is considering the idea of using the leased warehouse to make red and white hi-tech canoes as he believes there would be a high demand for these superior craft over the next eight years. After that time he believes that they will be superseded by a better model and the market will no longer exist.

He has spent the last 12 months researching this proposal (at a cost of $10,000) and has come up with the following information for the next eight years, at which time he will sell up in Klang and retire to Penang Island.

a. He forecasts that he can sell 300 canoes a year at a price of $2,750 each.

b. Variable costs per unit will be 60% of the selling price.

Answer 1