n the Dorben Company, a materials handlirg operation in the warehouse is being d
ID: 334557 • Letter: N
Question
n the Dorben Company, a materials handlirg operation in the warehouse is being done by hand labor. Annual disbursements for this labor and for related expenses (social security, accident insurance, and other fringe beneíits) are $8,200. The methods analyst is considering a proposal to build certain equipment to reduce this labor cost. The first cost of this equipment will be $15,000. It is estimated that the equipment will reduce annual disbursements for labor and labor extras to $3,300. Annual payments for power, maintenance, and property taxes plus insur estimated to be $400, S1,100, and $300, iespectively. The need for this particular operation is anticipated to continue for 10 years. Because the equipment is specially designed ior the particular purpose, it will have no salvage value. It is assumed that the annual disbursements for labor, power, and maintenance will be uniform throughout the 10 years. The minimum rate of return before taxes is 10 percent. Based on an annual cost comparison, should the company new material handling equipment? Producethe hew design! EXplain. ance are proceed with th I an the naini system uses the following factors:Explanation / Answer
Answer.
Dorben Co. should buy the machine equipment as it will save $1,000 over 10 years.
Right now the total expense for manual labor is $ 8,200
If Co. buys the equipment the total expenses will be
Labor and labor extras + power + Maintenance + property taxes + cost of machine/life in years
$3,300 + $400 + $1,100 + $300 + $1,500 = $6,600
Savings per year $1,600
Savings during ife of machine - $1,500 * 10 = $16,000
Total profit over the life $1,000.
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