Employees in factory are paid at a basic hourly rate of $5.50 for 35 hrs week. OT is paid at rate of $7.50 per hr. It takes one employee 3 hr to produce one unit of the sole product. On average employee work 4 hr of OT in a week.
Management are considering automating part of the production process which will reduce unit production time by 30 mins. It is expected that OT will not be needed under this system.
What would be the effect of new system on the per unit labor cost?
I saw the solution at back also can’t understand. Can someone help me. Thank you.
Total cost of a week now = 5.5 x35 + 4 x 7.5 = 222.50
That is for 39 hours.
Cost/unit = 222.5 x3/39 = 17.12
New cost/unit = 2.5 x 5.5 = 13.75
Saving = 17.12 – 13 75 = 3.37
Y did u multiply the time to make a product by the Labour cost n then devide by total hours?
I tried working it but divided the cost by hours without multiping by the time to make a product.
You have to bring in cost per unit because the saving in the answer is in terms of cost per unit.
I’m really stuck on this question as well.
I’m even more confused because the answer mentions 50 employees and then refers to the 50 employees throughout the answer.
But it doesn’t mention 50 employees in the question.
Am I correct please?
Basic hourly rate: 35 hrs x $5.50 = $192.50
OT: 4 hrs x $7.5 = $30
So 39hrs = $222.50
39hrs / 3hrs per unit = 13 units
$222.50 / 13 units = $17.12 (Hourly Labour unit cost)
Automation process hourly rate: 35 hrs x $5.50 = $192.50
35hrs / 2.5hrs per unit = 14 units
$192.50 / 14 units = $13.75 (Automated unit cost)
The effect of new system on unit labour cost:
$17.12 – $13.75 = $3.37 decrease
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