Consider two possible designs for a product which are sold for $0.70 each. There are only two differences in the production of both designs: operation 1 and operation 2. The first product, A, requires 16 hours of operation 1 and 4.5 hours of operation 2 for 1,000 units. The second product, B, requires 7 hours of operation 1 and 12 hours of operation 2 for 1,000 units. The variable operating costs of operation 1 (labor, materials, and maintenance) is $18.60 per hour. The variable operating cost of operation 2 (labor, materials, and maintenance) is $16.90 per hour. There is a sunk cost of $5,000 for product A and $9,000 for product B. Hint: Be careful in your consideration of sunk costs in making your decisions.
a) Which design should be adopted if 125,000 products are sold each year? Show all your work.
b) What is the annual savings over the other design? Show all your work.