A firm that manufactures sporting equipment is looking to monitor their input costs as they change over
Question:
A firm that manufactures sporting equipment is looking to monitor their input costs as they change over time. Management in this firm is confused as they have noticed that both their input prices and the respective quantities used tend to vary. Below the prices of four inputs (rubber, plastic, wood, metal) are given below alongside their respective quantities. Each is measured in “units” and “price per unit”.
Calculate the Laspeyres, Paasche and Fisher price index numbers to measure the price increases in 2020 (with 2010 = 100) and discuss the pros and cons of these indexes in measuring the price increases since 2010?
Ingredient | 2010 | 2020 | ||
Price per unit | Units | Price per unit | Units | |
Rubber | $12.20 | 5.2 | $15.10 | 5.3 |
Plastic | $22.15 | 3.0 | $21.70 | 3.5 |
Wood | $4.90 | 2.1 | $4.25 | 2.3 |
Metal | $9.85 | 1.1 | $11.50 | 1.4 |
- Laspeyres Price index for 2020 with 2010 as the base year:
2. Paasche Price index for 2020 with 2010 as the base year:
3. Fisher Price index for 2020 with 2010 as the base year:
4. Comment on the practical use of the above 3 price indexes:
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart