Final answer:
For a direct labor budget, direct labor hours are multiplied by the direct labor cost per hour. Method 1 is the most cost-effective both at the original and increased labor costs.
Step-by-step explanation:
When preparing the direct labor budget, the correct statement is that direct labor hours needed for production are multiplied by the direct labor cost per hour. To determine the most economical production method based on labor costs and capital costs, we calculate the total costs for each method. The costs are:
- Method 1: (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $5000 + $4000 = $9000
- Method 2: (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $2000 + $16000 = $18000
- Method 3: (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $1000 + $28000 = $29000
With labor at $100/unit, the best method is Method 1. If the cost of labor rises to $200/unit, the costs would be:
- Method 1: (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $10000 + $4000 = $14000
- Method 2: (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $4000 + $16000 = $20000
- Method 3: (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $2000 + $28000 = $30000
With the increased labor cost, Method 1 is still the most cost-effective.