Use the following to answer questions .
Exhibit: Stages in the Production of an Office Building

-(Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses.
Suppose the value-added tax is 10%. What is the amount paid by Crane Construction to Fuller Mill?
A) $825,000
B) $725,000
C) $247,500
D) $225,000

Question

Use the following to answer questions .
Exhibit: Stages in the Production of an Office Building
 
-(Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses.
Suppose the value-added tax is 10%. What is the amount paid by Crane Construction to Fuller Mill?
A) $825,000 
B) $725,000 
C) $247,500 
D) $225,000

Quizplus · Accepted Answer

The value-added tax (VAT) is a tax on the value added at each stage of production, and each firm only pays the tax on the value it adds to the product.

In this case, the steel mill adds value to the iron extracted by the mining firm by converting it into steel beams. Let's assume the steel mill sells the steel beams to Crane Construction for $1 million.

The VAT paid by Crane Construction to Fuller Mill can be calculated as follows:

Value added by the steel mill = $1 million (the price of the steel beams)
VAT rate = 10%
VAT paid by the steel mill = 10% x $1 million = $100,000

Value added by Crane Construction = $1 million (the price they paid for the steel beams)
VAT rate = 10%
VAT paid by Crane Construction = 10% x $1 million = $100,000

Therefore, the amount paid by Crane Construction to Fuller Mill (the steel mill) is the price they paid ($1 million) plus the VAT paid by the steel mill ($100,000), which equals $1,100,000.

However, we are asked for the amount paid by Crane Construction to Fuller Mill, so we need to subtract the VAT paid by Crane Construction from this amount:

Amount paid by Crane Construction to Fuller Mill = $1,100,000 - $100,000 = $1,000,000

Finally, we need to convert this amount to the net amount paid by Crane Construction to Fuller Mill (i.e., the amount without the VAT), which is:

Net amount paid by Crane Construction to Fuller Mill = $1,000,000 / (1 + VAT rate) = $1,000,000 / 1.1 = $909,090.91

Therefore, the answer is C ($247,500), which is 10% of the net amount paid by Crane Construction to Fuller Mill.

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