Two alternative designs are under consideration for a tapered fastening pin. The
ID: 1167404 • Letter: T
Question
Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.70 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 $18.60 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. (2.4)
a. Which design should be adopted if 125,000 units are sold each year?
b. What is the annual saving over the other design?
Explanation / Answer
a. Design B should be adopted if 125,000 units are sold each year.
b. The annual saving over the other design is $1287.5
Total Unit 125000 For Design A Lathe Drill Time Required/1000 unit 12 5 Variable Cost/Per Hour 18.6 16.9 Total Varible Cost/1000 unit 223.2 84.5 Total Varible Cost for 125000 unit 27900 10562.5 38462.5 Sunk Cost (Fixed Cost) 5000 Total Cost 43462.5 Selling Price / Unit $0.70 Total Selling price $87,500.00 Total Profit 44037.5 For Design A Lathe Drill Time Required/1000 unit 7 8 Variable Cost/Per Hour 18.6 16.9 Total Varible Cost/1000 unit 130.2 135.2 Total Varible Cost for 125000 unit 16275 16900 33175 Sunk Cost (Fixed Cost) 9000 Total Cost 42175 Selling Price / Unit $0.70 Total Selling price $87,500.00 Total Profit 45325 Savings 1287.5