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 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.
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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