Question

Uli Herbal Supplements purchases, in bulk, a variety of dietary supplements that the company bottles, packages, and ships to health-food stores and drugstores around the country. The company has a good reputation, and its products are in high demand. Last year the company purchased mechanical packaging equipment for $318,800 and reduced its shipping department by two people, eliminating an annual salary expense of $112,780. When it works, the equipment packages product 10 percent faster than the previous manual system. Unfortunately, the equipment has broken down on many occasions for up to four hours. Normally (when the packaging equipment is working), the company packages 2,600 bottles per hour, and the average contribution margin per bottle is $0.60. The general manager of operations has suggested that the company rehire the two packaging workers as backup for the new packaging system. The company president doesn’t think this is a good idea since the workers will only be working around 10 hour per week when the equipment is down and “sitting around doing nothing for 30 hours per week!

Calculate the incremental profit of hiring back the two workers. (Round answer to 0 decimal places, e.g. 125.)

Incremental select an option                                                          profitloss of hiring back the two workers

$enter a dollar amount per year  per year.

Answer 1

Bottles packaged per hour manually = 2,600/1.1

                                                          = 2,364 bottles

Incremental profit of hiring = Contribution margin earned on incremental bottles – Salaries paid

                                             = 2,364*0.60*10*52 – 112,780

                                              =737,568 – 112,780

                                              = $624,788 i.e. profit