Dude Skis plans to acquire an automated graphics lamination machine, which it will use to laminate graphics onto its high end skis. It plans to eliminate three direct labor positions and add one maintenance technician as a result of this change. The lamination machine costs $100,000 and will be depreciated over five years. The fully burdened cost of all three direct labor positions is $90,000, while the fully burdened cost of the new maintenance technician is $55,000. Dude’s cost accountant constructs the following table to summarize the situation:
|
Direct cost additions |
|
|
Annual machine depreciation |
+$20,000 |
|
Maintenance technician |
+55,000 |
|
Direct cost deductions |
|
|
Direct labor positions |
90,000 |
|
Net change in direct costs |
$15,000 |
The table reveals that Dude should install the machine, since there will be a net decline in direct costs. Additional factors to consider might be any history of machine breakdowns that could lead to the rehire of the laid off workers, as well as the risk that the machine’s manufacturer will go out of business and can therefore no longer support the machine. These are qualita tive risk factors.