The management of a private hospital is considering the inst

The management of a private hospital is considering the installation of an automatic telephone switchboard, which would replace a manual switchboard and elimatate the attendant operator\'s position The class of service provided by the new equipment is estimated to be at least equal to the present method of operation. To provide telephone service, five operators currently work threee shifts per day, 365 days per year. Each opeator earns $25,000 per year. Company-paid benefits and overhaed are 25% of wages. Money costs 8% after income taxes. Combined federal and state income taxes are 40% Annual propety taxes and maintance are 2 1/2 and 4% of investment, respectively. Depreciation is 15 year striaght line. Disregarding inflation, how large an investment in the new equipment can be economically justified by savings obtained by elimating the present equipment and labor cost? The existing equipment has zero slaveabe value. Show all your work.

Solution

If the company removes the current system of operation the amount it can save per annum can be calculated as follows: Each operator earns $14000 per year. Thus, wages of these 5 operators = 5*14000= $ 70000 pa. The amount saved on grounds of benefits and overheads= 25% of $70000= $ 17500 Federal and state taxes saved on this amount = 0