Help please
Last year, your firm spent $50,000 for a marketing study to see how its product would be perceived in a neighboring state. The study estimated that sales in the neighboring state would be $100,000 if your company optimally spent $40,000 in advertising targeting this new location. The increased sales of $100,000 would require your firm to spend an extra $20,000 on manufacturing. What is the Benefits of staying vs. expanding. The Opportunity costs of staying vs. expanding. The Sunk costs of each. The net benefit of each. Your firm should: Posted on Jan 17, 2017, by Waynel
Original post by Wlib
Last year, your firm spent $50,000 for a marketing study to see how its product would be perceived in a neighboring state. The study estimated that sales in the neighboring state would be $100,000 if your company optimally spent $40,000 in advertising targeting this new location. The increased sales of $100,000 would require your firm to spend an extra $20,000 on manufacturing. What is the Benefits of staying vs. expanding. The Opportunity costs of staying vs. expanding. The Sunk costs of each. The net benefit of each. Your firm should: Posted on Jan 17, 2017, by Waynel
the opportunity cost of staying is the lost potential value that they could have got from their next best alternative (leaving in this case). They would get sales of 100k in the new state, but would have to spend 40k on advertising and 20k on manufacturing. As such, the potential value from moving is 100k - 40k - 20k = 40k. Thus the opportunity cost of staying is 40k (I believe).
Sunk costs are costs that can't be recovered should the firm leave industry (as a whole). The most well known sunk costs are ones like advertising and marketing campaigns / studies. As such, in the case of the firm staying, they would have incurred sunk costs of 50k, because that is the amount they spent on marketing studies (which can't be recovered if the leave the industry). In the case of the firm moving to the new state, the firm would not only incurred the marketing study costs of 50k, but also the extra advertising costs of 40k (in order to get the necessary sales in the new area). As such, the sunk costs in this case are now higher (because the advertising costs cannot be recovered if the firm leaves the industry), and so the sunk costs in the case of moving / expansion is 50k + 40k = 90k.
As far as net benefits go, the firm has a net benefit of -50k if they stay because they would have simply wasted 50k on a marketing study. In the case of the firm expanding /moving, the firm would have made 100k in revenue from the sales, but spent 50k on marketing (which they did before the move) 40k on advertising, and 20k on manufacturing, meaning their net benefit is 100k = 50k - 40k - 20k = -10k. As you can see, the difference in net benefit between staying and moving is the same as the opportunity cost, 40k (staying net benefit, -50k, is 40k less than moving net benefit, -10k).
May I ask, is this an A-Level question?
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