A company uses an old method of machining a part manufactured for sale. The estimates of operating details for the year 2005 06 are given below.
Number of parts to be manufactured and sold: 30, 000
Raw materials required per part: 10 kg @ Rs.2 per kg
Average wage rate per worker: Rs.40 per day of 8 hours
Average labor efficiency: 60%
Standard time required to manufacture one part: 2 hours
Overhead rate: Rs.10 per clock hour
Material handling expenses: 2% of the value of raw material.
The company has a suggestion box scheme and an award equivalent to three months saving in labor cost is passed on to the employee whose suggestion is accepted. In response to this scheme suggestion has been received from an employee to use a special Jig in the manufacture of the aforesaid part. The cost of the Jig, which has life of one year is Rs.30, 000 and the use of the Jig will reduce the standard time by 12 minutes.
Required:
[a] Compute the amount of award payable to the employee who has given the suggestion.
[b] Prepare a statement showing the annual cost of production before and after the implementation of the suggestion to use the Jig and indicate the annual saving.
[c] State the assumptions on which your calculations are based.