Model: Cost of conversion and Computation of saving
A factory undertakes production to customer’s satisfaction. Worker A was entrusted with the production of 200 units of product AA’ in 100 hours and worker B was asked to produce 100 units of product BB’ in 200 hours. The ruling rate of wages is Rs. 5 per hour which is guaranteed irrespective of the standard of efficiency. If the work given is finished within the time allotted, the worker gets Rs. 6 per hour for the time taken. Time saved is rewarded by an incentive bonus of 50% of wages earned per hour. A completes the job in 80 hours and B in 120 hours.
Assuming that the prevailing overhead rate is Rs. 10 per labour hour, indicate the impact of the system of wages coupled with the incentive scheme on the profits of the company when compared to a straight piece rate at Rs. 6 per hour. The fixation of hourly rates is understood to provide for a saving of 20% of the time fixed when the work is carried out by an efficient worker under normal conditions.
Pass your comments on the basis of rate fixation in the circumstances.