Explore BrainMass

Explore BrainMass

    Cost benefit analysis of new machinery

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Suppose the plant manager of a manufacturing firm hires you to help him analyze a proposal to purchase a new and faster stamping machine. He provides you with the following information:

    a. The new machine is four times as fast
    b. The old machine is able to process material at a rate of 60 units per hour
    c. Demand is approximately 100,000 stampings per year
    d. The cost of direct labor is $15.00 per hour
    e. The overhead factor for this process is 3 times direct labor
    f. The net cost of the new machine is $40,000. (This includes the salvage value of the old machine)

    Using the standard cost procedure, determine the total annual cost savings realized from the purchase of the new machine. Then, present a discussion of the reasons these figures could present a false picture of reality.

    ATTEMPT AT PROBLEM SOLUTION
    60UNITS X 4 (TIMES FASTER) = 240 UNITS WITH THE NEW MACHINE

    240 UNITS X 2080 HOURS IN A YEAR = 499,200 UNITS PER YEAR (WITH THE NEW MACHINE)

    15PER HOUR OF LABOR X 2080 = 31200

    OVER HEAD FACTOR = 3 X 15 = 45

    40,000 COST OF NEW MACHINE
    -31200 DIRECT LABOR
    -45 OVERHEAD
    = 8800 - ANNUAL COST SAVINGS

    I DON'T KNOW WHY THIS WOULD PRESENT A FALSE PICTURE OF REALITY.

    I AM JUST VERY LOST AND HAVE ABOUT 10 SIMILAR PROBLEMS TO FIGURE OUT. IF I CAN GET A GRASP ON THIS ONE THEN I'M HOPING I WILL BE ABLE TO WORK SOME OF THE OTHER PROBLEMS.
    ---

    I am having trouble on how to approach this problem and don't understand how to calculate it. I am looking for a break down of the steps so I can understand the solution. I have spend three hours on this and have hit a wall. Thank you very much for your assistance. It requires a non complex solution and then an explanation of why.

    © BrainMass Inc. brainmass.com June 3, 2020, 6:13 pm ad1c9bdddf
    https://brainmass.com/business/business-math/cost-benefit-analysis-of-new-machinery-51356

    Attachments

    Solution Preview

    For each year this machinery will save $ 75000 for 4 years if ...

    Solution Summary

    This explains the way to do the cost benefit analysis of purchase of new machinery.

    $2.19

    ADVERTISEMENT