Question

You produce tires. Your neighbor produces rims. Your neighbor suggests trading 25% of his annual production to you for 50% of your annual production. You produce 100,000 tires per year while your neighbor produces 40,000 rims. Your tires sell for $150 per set of 4, while your neighbors rims sell for $600 per set of 4. If you accept this trade, how much profit will you net from this transaction?

Answer 1

Value of tires given up : per unit Annual prouduction x_50/ :1) x_sale price of tive [100,000 x 50'/] x $150 4 50,000 x $150 4 $1,875.000 Value of rims accepted (annual production X 257] x sale price per unit of rim [ 40,000 x 25%.]x $ 600 I 4 = 10,000 X 150 $_1,500,-0.00 - As value given up < Value accepted. Value accepted there will be a_net loss from this transaction to us. Net loss $1,500,000 E) $1,875,000 $_(375,000)