Answer to Question #63048 in Economics for abdelrahman

Question

A manufacturer makes 7,900,000 memory chips per year. Each chip takes 0.4 minutes of direct labor at the rate of $8 per hour. The overhead costs are estimated at $11 per direct labor hour. A new process will reduce the unit production time by 0.01 minutes. If the overhead cost will be reduced by $5.50 for each hour by which total direct hours are reduced, what is the maximum amount you will pay for the new process? Assume that the new process must pay for itself by the end of the first year.

Answer 1

The maximum amount to pay for the new process:
S1 = 7,900,00 chips · 0.01 min/chip · (1 hour/60 minutes) · ($8/hour + $5.5/hour) = $17,775