In the Dorben Company, a materials handling operation in the warehouse is being
ID: 354681 • Letter: I
Question
In the Dorben Company, a materials handling operation in the warehouse is being done by hand labor. Annual disbursements for this labor and for related expenses (social security, accident insurance, and other fringe benefits) are $8.200. The methods analyst is considering a proposal to build certain equipment to reduce this labor cost. The first cost of this equipment will be $15,000. It is estimated that the equipment will reduce annual disbursements for labor and labor extras to $3,300. Annual payments for power, maintenance, and property taxes plus insur- ance are estimated to be $400, $1,100, and $300, respectively. The need for this particular operation is anticipated to continue for 10 years. Because the equipment is specially designed for the particular purpose, it will have no salvage value. It is assumed that the annual disbursements for labor, power, and maintenance will be uniform throughout the 10 years. The minimum rate of return before taxes is 10 percent. Based on an annual cost comparison, should the company proceed with the new material handling equipment?Explanation / Answer
the annual cost of labor in the present system - $8,200.
the cost of the machine is $15,000, the interest rate expected to be 10%. the total cost of the machine for 10 years is= 15,000*2.594= $25,940
the benefit with the machine is- $3,300 and the additional costs are $1,800. the net benefits are 3300-1800= $1500 per annum
the total benefits for 10 years= 1500*15.937= $23,905.5
the machine is costing higher than present system.
if they follow the new system, the total cost is $25,940 and the benefit is $23,905.5