Question

Crossroad corporation is trying to decide whether to invest to automate a production line. If the project is accepted, labor costs will decrease by 304,000 per year. However, other cash operating expenses will increase by221,000 per year. The equipment will cost 154,000 and is depreciable over 13 years using simplified straight line to a zero salvage value. Crossroad will invest18,000 in net working capital at installation. The firm has a marginal tax rate of 34

1) Yes
2) No

Answer 1

The best production method is Method 2, with a total cost of $18,000. If the cost of labor rises to $200 per unit, the best production method becomes Method 1, with a total cost of $14,000.

Step-by-step explanation:

To determine the best production method, we need to compare the total cost of each method. Method 1 requires 50 units of labor and 10 units of capital, while Method 2 requires 20 units of labor and 40 units of capital, and Method 3 requires 10 units of labor and 70 units of capital. Given that labor costs $100 per unit and capital costs $400 per unit, we can calculate the total cost for each method. Method 1: (50 units of labor x $100/unit) + (10 units of capital x $400/unit) = $5,000 + $4,000 = $9,000. Method 2: (20 units of labor x $100/unit) + (40 units of capital x $400/unit) = $2,000 + $16,000 = $18,000. Method 3: (10 units of labor x $100/unit) + (70 units of capital x $400/unit) = $1,000 + $28,000 = $29,000.

Therefore, Method 2 is the best production method as it has the lowest total cost of $18,000.

If the cost of labor rises to $200 per unit, we can recalculate the total cost for each method. Method 1: (50 units of labor x $200/unit) + (10 units of capital x $400/unit) = $10,000 + $4,000 = $14,000. Method 2: (20 units of labor x $200/unit) + (40 units of capital x $400/unit) = $4,000 + $16,000 = $20,000. Method 3: (10 units of labor x $200/unit) + (70 units of capital x $400/unit) = $2,000 + $28,000 = $30,000.

Therefore, if the cost of labor rises to $200 per unit, Method 1 becomes the best production method with a total cost of $14,000.