Joe Jones is an entrepreneurial student who decides to earn some funds to subsidise his studies. He purchases 25kg bags of potatoes and re-bags them into smaller 2.5kg bags and then sells them at the side of the road to passing traffic. In his first week he buys 20 bags and the farmer charges £200. He charges £2 for each 2.5kg bag. He had a great week and sold all of the potatoes. At the start of the second week he goes back to the farmer to buy the potatoes only to discover that the cost has increased to £260 for 20 bags. He is surprised by the increase as the inflation for the week was only 5%.
a. You are required to compute Joe’s income for the first week on:
i. A historical cost basis;
ii. A replacement cost basis;
iii. A current purchasing power basis.
b. Comment on the usefulness of the three measurement methods calculated in part (a).