1. Electrotech, a maker of household smoke detectors, buys resistors for its smo

Question

1. Electrotech, a maker of household smoke detectors, buys resistors for its smoke alarms for $.15 each. The resistor manufacturer marks-up the resistors from $.10.

Does the resistor manufacturer’s mark-up necessarily represent profit?

Will Electrotech make more profit by making its own resistors and avoiding this mark-up?

4. Suppose that athletic shoe manufacture Avia redevelops its entire line of shoes but is unsure what its popularity will be. It order to guarantee a market for its shoes, it buys retailer Finish Line, which will carry the revamped line of shoes. Is vertical integration for this reason a profitable idea? Briefly explain.

Explanation / Answer

Hi,

The correct answer is as follows:

1. yes, the he resistor manufacturer’s mark-up represents profit.

Yes, Electrotech make more profit by making its own resistors and avoiding this mark-up because it can produce the same product at a lower price of $.10

2. yes, vertical integration might be a good idea in this case as it will give Avia more control over Finish Line to market its products. The main idea behind vertical integration is to reduce cost and have a greater control over operations. Hence, the idea of vertical integration can be a good idea here

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