Question

A manually operated production machine costs $ 50,000. It will have a service life of 6 years with an anticipated salvage value of $ 3,000 at the end of its life. The machine will be used to produce one type of part at a rate of 12 units/h. The annual cost to maintain the machine is $ 2000. A machine overhead rate of 20 % is applicable to capital cost and maintenance. Labor to run the machine costs $10.00/h and the applicable overhead rate is 30%. Determine the profit break-even point if the product is sold for $ 1.25/unit and the rate-of-return criterion is 20%.

Suppose that an alternative to the manually operated production machine (previous example) exists. The alternative is an automated machine, costing $100,000, but capable of a production rate of 30 units/h. Its service life is 5 years with salvage value of $ 10,000 at the end of that time. Annual maintenance will cost $ 7,000. One-third of one operator costing $15.00/h will be required to run the machine. The overhead rates and rate of return used in the previous paragraph are applicable. Determine the break-even point for the automated and manual methods of production. How many hours/year will be needed to achieve the breakeven point for each of these machines?

Answer 1