Question

To produce a certain product, there are two competing processes under consideration. Process A

requires acquisition of a new machine that is estimated to have an initial cost of $30,000 and a salvage

value of $12,000 at the end of its useful life of 6 years. In addition, the process requires a fixed cost of

$47,000 per year and a variable cost of $250 per day. Alternatively, Process B requires the use of human

labor. The process will need 6 workers, each earning $100 per day and will have a fixed cost of $20,000

per year and additional variable costs of $200 per day.

State the factor of interest to consider for this problem. ( what is the main factor to consider) ?

To produce a certain product, there are two competing processes under consideration. Process A

requires acquisition of a new machine that is estimated to have an initial cost of $30,000 and a salvage

value of $12,000 at the end of its useful life of 6 years. In addition, the process requires a fixed cost of

$47,000 per year and a variable cost of $250 per day. Alternatively, Process B requires the use of human

labor. The process will need 6 workers, each earning $100 per day and will have a fixed cost of $20,000

per year and additional variable costs of $200 per day. (intrest rate 2% per year)

State the factor of interest to consider for this problem.( what is the main factor to consider)?

Answer 1

1.

Particulars	Process A	Calculation	Process B	Calculation	Additonal Cost of A over B
Fixed Cost	50,000		20,000		30,000
	Depreciation	3,000	(30000-12000)/6
	Machine Cost	47,000		20,000
Variable Cost	250		800		-550
	Variable cost	250		200
	Workers Cost	-		600	(6 workers *100 per day)

As we can see above that in Process A fixed costs are higher by 30,000 but it will provide savings of 550 per day. Therefore factor of interest (main factor) in this problem would be "How many days production will happen in a year'. If the number of days are more than (30,000/550) 55 days then Process A is better because of lower variable cost else if it is lower than 55 days then Process B is better because of lower fixed cost.

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