We have a product that is in very high demand; we can sell as much as we can make. Two methods of producing the item are available: a manual method and an automated method. The manual method requires two workers at $10.00 /hour each. Together, they produce 25 parts per hour. The automated method requires an initial investment of $150,000 in equipment, which will have a 4 year service life, no salvage value, and $5000 maintenance per year. The automated equipment requires no labor, but consumes 50 kW when running, at $0.05/kW-hour. It produces 100 parts per hour.
We can buy as many of the machines, or hire as many of the workers, as we like, and keep them busy producing this product. Whichever method we use, we will operate 40 hours per week, 50 weeks per year. Assume that the interest rate is 25%.
a) What is the direct cost per unit of manual production? (ignore overhead)
b) What is the direct cost per unit of automated production? (ignore overhead)
c) Which would you recommend?
d) Would your choice change if we ran automated production for multiple shifts?