Chapter 13, Problem 34P

To determine

The difference between EUAC’s of upgrading option and labor-intensive process option

Answer to Problem 34P

The difference in EUAC’s is $5,325

Explanation of Solution

Upgrade option

Cost of upgrade = $12,000, i = 15%, n = 9 years

  $\begin{array}{l}\text{EUAC of upgrade option}=\text{Cost}\times \left(A/P,i\%,n\right)\hfill \\ =12,000\times \left(A/P,15\%,9\right)\hfill \\ =12000\times 0.2095\hfill \\ =\$2,515\hfill \end{array}$

Labor intensive option

  $\begin{array}{c}\text{Direct labor cost }=\$3,500\\ \text{Indirect plant expenses }=60\%\times 3500 \\ =\$2,100\\ \text{Office overhead }=40\%\times \left(3500+2100\right) \\ =\$2,240\end{array}$

  $\begin{array}{l}\begin{array}{c}\text{EUAC of labor intensive option}=3500+2100+2240\\ =\$7840\end{array}\hfill \\ \hfill \end{array}$

  $\begin{array}{l}\text{Difference in EUAC’s of both options}=\text{EUAC of labor option}–\text{EUAC of upgrade option}\hfill \\ =7840–2515\hfill \\ =\$5,325\hfill \end{array}$