In the operation of a certain production machine, one worker is required at a direct labor rate = $10 per hour. Applicable labor factory overhead rate = 50%.
Capital investment in the machine = $250,000, expected service life = 10 years, with no salvage value at the end of that period. Applicable machine factory overhead rate = 30%.
The work cell will operate 2000 hours per year. Rate of return is 25%.
(a) Determine the appropriate hourly rate for this work cell.
(b) Suppose that the machine were operated three shifts, or 6000 hours per year, instead of 2000 hours per year.
Determine the effect of increased machine utilization on the hourly rate compared to the rate determined in (a).