Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for Php 35 each. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and drill operations. Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is Php 930 per hour. The variable operating cost of the drill, including labor, is Php 845 per hour. Finally, there is a sunk cost of Php 250,000 for Design A and Php 450,000 for design B due to obsolete tooling. Which design should be adopted if 125,000 units are sold per year? What is the annual savings over the other design?
Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for Php 35 each. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and drill operations. Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is Php 930 per hour. The variable operating cost of the drill, including labor, is Php 845 per hour. Finally, there is a sunk cost of Php 250,000 for Design A and Php 450,000 for design B due to obsolete tooling. Which design should be adopted if 125,000 units are sold per year? What is the annual savings over the other design?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for Php 35 each. Either design will serve equally well and will involve the same material and
Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is Php 930 per hour. The variable operating cost of the drill, including labor, is Php 845 per hour. Finally, there is a sunk cost of Php 250,000 for Design A and Php 450,000 for design B due to obsolete tooling.
- Which design should be adopted if 125,000 units are sold per year?
- What is the annual savings over the other design?
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