Two alternative designs are under consideration for a tapered fastening pin. The
ID: 1148074 • Letter: T
Question
Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for SO.70 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 12 hours of lathe time and 5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 8 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is S18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling. Which design should be adopted if 125,000 units are sold each year?Explanation / Answer
Revenue from selling pins = 0.70 x 125000 = $87500
Design A
Sunk cost = $5000
Lathe time required = 12 x 125000 / 1000 = 1500 hours
Cost of Lathe = 18.60 x 1500 = $27900
Drill time required = 5 x 125000 / 1000 = 625 hours
Cost of Drill = 16.90 x 625 = $10562.5
Total cost = $5000 + $27900 + $10562.5 = $43462.5
Profit = Revenue – Costs = $87500 – $43462.5 = $44037.5
Design B
Sunk cost = $9000
Lathe time required = 7 x 125000 / 1000 = 875 hours
Cost of Lathe = 18.60 x 875 = $16275
Drill time required = 8 x 125000 / 1000 = 1000 hours
Cost of Drill = 16.90 x 1000 = $16900
Total cost = $9000 + $16275 + $16900 = $42175
Profit = Revenue – Costs = $87500 – $42175 = $45325
Design B should be adopted because it results in higher profits.