Background Info:
Scheduled production per 8 hour shift = 24,000 units
Labor cost per 8 hour shift = $1,800
Benefits per 8 hour shift = 38.5% of labor cost
Annual production forecast = 6,240,000 units
We are looking to purchase a piece of equipment that our Engineering Department has recommended. Engineering estimates the proposed equipment will reduce combined labor and benefit expenses by 8.5%. The additional annual operating cost for the proposed equipment, including depreciation, energy consumption, and maintenance is estimated to be $55,000.
1. Using the background information and assumptions above, calculate the difference in the operating cost per year between the existing equipment and the proposed.
2. What decision would you make regarding this piece of equipment and why?