Question

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The break-even point is to be determined for two production methods, one manual and the other automated. The manual method requires two workers at $18.00 per hour each. Together, their production rate is 40 units per hour. The automated method has an initial cost of $200,000, a 4-year service life, no salvage value, and annual maintenance cost is S5000. The variable cost for the automated method is $6.00 per hour. The production rate for the automated machine is 60 units per hour. (a) Determine the break-even point for the two methods, using a rate of return-15%, (b) How many hours of operation per year would be required for each method to reach the breakeven point? 4.

Answer 1

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"a) Manual method, variable cost would be = (2 workers) * (USD 18/hr) (40 unit/hr) = 36/40 = USD 0.90/unit Total cost as function Q would be, Total cost = 0.90 * Q Automated method, factor = (0.15) * (1 + 0.15)^4/(1 + 0.15)^4 -1 = 0.3503 fixed cost = USD 200, 000 * 0.3503 + USD 5000 = USD 75060 per year variable cost = (USD 6/hr)