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Stephanie

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Question 6

Hello,

Regarding the answer to question #6 : "Wages will decrease by (25%*0.85)=21% to about 4% of total costs when moving production to China" what is the logic behind it? ( Multiplying it with .85 and then stating that 4% is the answer?

Thank you so much.

Hello,

Regarding the answer to question #6 : "Wages will decrease by (25%*0.85)=21% to about 4% of total costs when moving production to China" what is the logic behind it? ( Multiplying it with .85 and then stating that 4% is the answer?

Thank you so much.

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Hello Anonymous,

The key here is to understand that both the 21% and 4% are relative to total cost.

Here it goes:

Current wages are 25% of total costs.

In China, wages are only 15% of what they currently are. Hence you save 85%.

By moving to China, wages will become approx 4% of total cost (= 25% * 15%).

Said differently, you will save approx 21% of total cost (= 25% * 85%).

Does this make sense?

Best

Stephanie.

Hello Anonymous,

The key here is to understand that both the 21% and 4% are relative to total cost.

Here it goes:

Current wages are 25% of total costs.

In China, wages are only 15% of what they currently are. Hence you save 85%.

By moving to China, wages will become approx 4% of total cost (= 25% * 15%).

Said differently, you will save approx 21% of total cost (= 25% * 85%).

Does this make sense?

Best

Stephanie.

Hi Stephanie, — Anna on Aug 30, 2019

Just following up on that. Shouldn't the new total costs be lower if the wages have decreased? — Anna on Aug 30, 2019

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Stephanie gave a great explanation. I would just add that the wages will be the 4% of the original total costs.

If we refer to the new amount of costs, producing in china, the incidence of the wages will be

4% / (100 % - 21%) = 5%

Hope it helps,
Luca

Stephanie gave a great explanation. I would just add that the wages will be the 4% of the original total costs.

If we refer to the new amount of costs, producing in china, the incidence of the wages will be

4% / (100 % - 21%) = 5%

Hope it helps,
Luca

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