A company has inventory of $200,000 in a warehouse that is completely destroyed by fire. There is no insurance to cover this loss. The cost to replace the inventory is $250,000. What inventory cost should the manger use to estimate economic profit?

A company has inventory of $200,000 in a warehouse that is completely destroyed by fire. There is no insurance to cover this loss. The cost to replace the inventory is $250,000. What inventory cost should the manger use to estimate economic profit?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter7: Economies Of Scale And Scope

Section: Chapter Questions

Problem 7.5IP

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Concept explainers

Cost of Production

In economic theory, production costs are the costs incurred by an industrial organization when it engineers a project or provides a service that generates revenue and benefits. Labor costs, raw materials, consumable manufacturing costs, and general overhead sum up, accounting for production costs. Total cost data is calculated by combining total direct costs of materials, labor costs, and total production costs.

Question

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A company has inventory of $200,000 in a warehouse that is
completely destroyed by fire. There is no insurance to cover
this loss. The cost to replace the inventory is $250,000.
What inventory cost should the manger use to estimate
economic profit?
O a. 250000
O b. -50000
O c. 50000
O d. -200000
О е. 200000

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