In the operation of a certain production machine, one worker is required at a di

Question

In the operation of a certain production machine, one worker is required at a direct labor rate = $10/hr. Applicable labor factory overhead rate = 50%. Capital investment in the machine = $250,000, expected service life = 10 years, with no salvage value at the end of that period. Applicable machine factory overhead rate = 30%. The work cell will operate 2,000 hr/yr. Rate of return is 25%. (a) Determine the appropriate hourly rate for this work cell, (b) Suppose that the machine were operated three shifts, or 6,000 hr/yr, instead of 2,000 hr/yr. Determine the effect of increased machine utilization on the hourly rate compared to the rate determined in (a).

Explanation / Answer

Ans-

Capital investment=$250000

Life =10years

Depreciation (250000/10)$25000 p.a

Direct labor rate =$10/hr

Labor factory overhead rate=50% or $5/hr

Machine fatory overhead rate=30% or $3/hr

Total variable overhead =$18/hr

No of hour 2000hr/yr

Total variable overhead (18*2000) $36000

Add-depreciation $25000

total cost $61000

a) hourly rate for this work cell(61000/2000)$30.5

b)if machine operate 3 shifts total hour 6000/yr

hourly rate for this work cell(61000/6000)$10.17

so hourly rate is decreased from $30.5 to $10.17

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