he Catseye Marble Co is thinking of replacing a manual production process with a
ID: 2370745 • Letter: H
Question
he Catseye Marble Co is thinking of replacing a manual production process with a machine. The manual process requires three relatively unskilled workers and a supervisor. Each worker makes $17,500 a year and the supervisor earns $24,500. The new machine can be run with only one skilled operator who will earn $41,000. Payroll taxes and fringe benefits are an additional third of all wages and salaries. The machine costs $150,000 and has a tax depreciation life of five years. Catseye elects straight line depreciation for tax purposes. A service contract covers all maintenance for $5,000 a year. The machine is expected to last six years, at which time it will have no salvage value. The machines
Explanation / Answer
a. Annual labor savings:
Old labor: $17,500 X 3 + $24,500 = $77,000
New labor: $41,000
Savings $36,000
Fringe Benefits @ 1/3 $12,000
Annual Labor Savings $48,000
(you can add the fringes prior to taking the net on labor
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