Break-even quantity for making dumbwaiters for business

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Reference no: EM132078784

(a) A consulting engineer is considering two pumps to meet a demand of 50,000 L/min at 4.0 m total dynamic head. The specific gravity of the liquid being pumped is 1.50. Pump A operates at 70% efficiency and costs $8,000; pump B operates at 75% efficiency and costs $12,500. Power costs $0.05 kW.hr. Continuous pumping for 365 days a year is required (i.e. for 24 hours a day). Ignoring the time value of money, and assuming equal salvage values for both pumps, DETERMINE how many years of service are required for pump B to be justified economically. COMMENT on the reasonableness of not including the time value of money.

(Note: Dynamic head times litres per minute times specific gravity divided by 6,116.2 gives the number of kilowatts required.) [10 marks]

(b) Smythe and Jones Ltd purveyors to the gentry create individual dumbwaiters. The fixed costs of operating the workshop for a month total $3,000. Each dumbwaiter requires materials that cost $12. Each dumbwaiter takes three hours to complete, and the company pays the workers $18 per hour. The employees are paid as casuals so that if there is no work for them they are not paid. The dumbwaiters are sold to a wholesaler for $75 each.

(i) CALCULATE the break-even quantity for making dumbwaiters for this business.

The company expects to sell 500 dumbwaiters per month. The business has the opportunity to rent a polishing machine for $7,000 per month. If the machine is used there is estimated to be associated extra costs (utilities and consumables) of $2 per dumbwaiter. Using the machine would reduce the labour time per dumbwaiter to 2 hours, but the casual workers would still paid at $18 per hour.

(ii) CALCULATE the break-even quantity for making dumbwaiters for this business.

(iii) DISCUSS the advice you would give Smythe and Jones Ltd regarding the renting of the polishing machine.

Reference no: EM132078784

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