Nicole owns a small pottery factory.she can make 1000 pieces of potter...
Profit and Loss Calculation:
Nicole's revenue from selling 1000 pieces of pottery = 1000 x 100 = Rs. 1,00,000
Cost of raw materials = Rs. 20,000
Total cost of production = Rs. 20,000 + Rs. 50,000 (investment) + Rs. 5,000 (interest on borrowed money) = Rs. 75,000
Profit = Revenue - Total cost of production = Rs. 1,00,000 - Rs. 75,000 = Rs. 25,000
Return on Investment Calculation:
Return on investment (ROI) = (Profit / Total investment) x 100
Total investment = Rs. 1,00,000 (savings) + Rs. 50,000 (borrowed money) = Rs. 1,50,000
ROI = (Rs. 25,000 / Rs. 1,50,000) x 100 = 16.67%
Opportunity Cost Calculation:
If Nicole works at a competing pottery factory, she can earn Rs. 40,000 per year. Therefore, her opportunity cost of running her own pottery factory is Rs. 40,000.
Should Nicole continue running her pottery factory?
Yes, Nicole should continue running her pottery factory as her ROI is higher than the opportunity cost of working at a competing pottery factory. Her ROI of 16.67% is higher than the interest rate of 10% at which she borrowed money. Therefore, she is making a profitable investment by running her own pottery factory.
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