Question

The Lake Company is considering a project with the following information:

Life = 8
Cost = (658,440)
Overhead = 15,340
Initial Labor Saving per unit = 0.84
Change in labor savings per quarter = 0.07
Capacity = 100,000
Tax Rate = 21%
Cost of Capital = 2.52%
Determine the operating cash flows for quarters 0 through 8:
Labor savings
Overhead Savings
Depreciation
Net Income Before Tax
Income Tax
Net Income After TaxDepreciation Reversal
Period Cash Flow
Determine the net present value: ?
Should they accept the project: Yes or No?

Answer 1

With labor costing $100/unit and capital costing $400/unit, Method 1 is the most cost-effective production method. If the cost of labor rises to $200/unit, Method 1 still remains the most cost-effective due to its lower total cost compared to the other methods.

Step-by-step explanation:

To determine the best production method, we need to calculate the total costs for each at the given price points for labor and capital. Let's look at the cost breakdown for each method originally and then when the cost of labor increases:

• Original Costs (Labor cost at $100/unit, Capital cost at $400/unit):
  
  • Method 1: (50 labor units × $100) + (10 capital units × $400) = $9,000
  • Method 2: (20 labor units × $100) + (40 capital units × $400) = $18,000
  • Method 3: (10 labor units × $100) + (70 capital units × $400) = $29,000
• Increased Labor Costs (Labor cost at $200/unit, Capital cost remains at $400/unit):
  
  • Method 1: (50 labor units × $200) + (10 capital units × $400) = $14,000
  • Method 2: (20 labor units × $200) + (40 capital units × $400) = $22,000
  • Method 3: (10 labor units × $200) + (70 capital units × $400) = $31,000

At the original cost of labor, Method 1 has the lowest total cost and is therefore the best production method. When the cost of labor increases, Method 1 continues to have the lowest cost, so it remains the best method.