E7-9 Rachel Ray recently opened her own basket weaving studio. She sells finishe
ID: 2379860 • Letter: E
Question
E7-9 Rachel Ray recently opened her own basket weaving studio. She sells finished baskets in addition to the raw materials needed by customers to weave baskets of their own. Rachel has put together a variety of raw material kits, each including materials at various stages of completion. Unfortunately, owing to space limitations, Rachel is unable to carry all varieties of kits originally assembled and must choose between two basic packages.
The basic introductory kit includes undyed, uncut reeds, (with dye included) for weaving one basket. This basic package costs Rachel $14 and sells for $30. The second kit, called Stage 2, includes cut reeds that have already been dyed. With this kit the customer need only soak the reeds and weave the basket. Rachel is able to produce the second kit by using the basic materials included in the first kit and adding one hour of her own time, which she vales at $18 per hour. Because she is more efficient at cutting and dying reeds than her average customer, Rachel is able to make two kits of the dyed reeds, in one hour, from one kit of undyed reeds. The Stage 2 kit sells for $35.
INSTRUCTIONS:
Determine whether Rachel
Explanation / Answer
Basic Kit Selling Price = 30
Package Costs = 14
Net Benefit = 16
Second Kit Selling Price = 35
Material = 14/2 = 7
Labor Cost = 18/2 = 9
Net Benefit = 19
Incremental Analysis Selling Price = 5
Material = 7
Labor Cost = (9)
Net Benefit = 3
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