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50 employees in a factory are paid at a basic hourly rate of $5.5’0 for a 35 hour week. Overtime is paid at a rate of $7.50 per hour. It takes one employee 3 hours to produce one unit of the sole product. On average employees work 4 hours of overtime in a week.
Management are considering automating part of the production process which will reduce unit production time by 30 minutes. It is expected that overtime will not be needed under this system.
What would be the effect of the new system on the per unit labour cost?
a) $3.37 increase
b) $2.31 decrease
c) $3.37 decrease
d) $2.31 increaseAny answers given will be greatly appreciated. Thank you
b.
one employee is working 35+4=39 hours.
it takes him 3 hours to produce 1 unit, this means he produces 39/3=13 units in one week.his payment in a week is: 35 x 5.5 + 4 x 7.5=222.5
therefore, cost/u= 222.5/13=17.12in the new system, there will be no overtime.
this means each employee will produce 13 units in 35 hours.
payment for 35 hours= 35 x 5.5=192.5
so the new cost/u=192.5/13=14.8the diff Old sys – new system = 17.2 – 14.8 = 2.31, which is a decrease
Mansoor thanks for your answer but I just want to know that should not we also consider the fact that it says the profuction time will decrease by 30 minutes.
Which may imply that before it was taking 3 hours to make one unit and now since its 30 mins less so it will take only 2.5 hours, so we sould be dividing total hours worked which are 35 hours( no overtime) by 2.5 to get 14. So 14 units will be completed in that weeks time.
which in turn means 192.5 divide by 14 to give 13.75 which is decrease of 3.37 (17.12-13.75)
Comment please
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