Question

production improvement option b (with capital costs of $1.6 million per million pairs of production capacity and annual depreciation costs of 10%) that reduces production run setup costs by 50% each year makes the most economic sense in which one of the following circumstances?

Answer 1

A) When the current setup cost per million pairs of production capacity is $500,000

The cost-benefit analysis for this scenario would be as follows:

1. Calculate the capital costs: $1.6 million per million pairs of production capacity

2. Calculate the annual depreciation costs: 10% of the capital costs, which is $160,000 per million pairs of production capacity

3. Calculate the savings from the improvement option:

50% of $500,000, which is $250,000

4. Subtract the annual depreciation costs from the savings:

$250,000 - $160,000 = $90,000

5. Calculate the net savings: $90,000 per million pairs of production capacity.

In this scenario, the net savings from implementing the improvement option would be $90,000 per million pairs of production capacity, making it the most economically sensible choice.

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