The hourly rate for a certain work center is to be determine

The hourly rate for a certain work center is to be determined based on The following data: direct labor rate = $15.00/hr; applicable factory overhead rate on labor = 35%; capital investment in machine = $200, 000; service life of The machine = 5 years; rate of return = 15%; salvage value in 5 years = zero; and The applicable factory overhead rate on The machine = 40%. The work center will be operated two 8-hr shifts, 250 days per year. Determine The appropriate hourly rate for The work center. If The workload for The cell can only justify a one shift operation, determine The appropriate hourly rate for The work center.

Solution

A) =0.15(1 + 0.15)^5  / (1+0.15)^ 5 -1

= 0.15  * 2.011357  / 2.011357  -1

=0.30170   /  1.011357

=0.2983120

Capital Investment  =$200,000 * 0.2983120

=$59,662

Hours =  16 hr per day  *250 days per year

=4,000 hr

So, $59,662  /4,000 hr

=$14.92 hr

Finally, Factory over head on machine and Factory over head on labor

$15.00 (1+0.35)+ $14.92 (1+0.40)

=$20.25  + $20.89

=$41.14 per hour

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B)Capital Investment  =$200,000 * 0.2983120

=$59,662

Hours =  8 hr per day  *250 days per year

=2,000 hr

So, $59,662 / 2,000 hr

=29.83

$15.00 (1+0.35)+ 29.83 (1+0.40)

=$15*1.35 + 29.83 *1.40

=$20.25 + $41.76

=$62.01 per hour

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