Answer:
Method 1 should be chose, since it is still the cheapest if labor cost rises to $200/unit.
Explanation:
Total Cost = ( units * labor costs) + (capital cost * units of labor)
Total Cost for Method 1 : (50 * 100) + (10*400)
= $9,000
Total Cost for Method 2 : (20 * 100) + (40*400)
= $18,000
Total Cost for Method 3 : (10 * 100) + (70*400)
= $29,000
If the price of labor rises to $200 then:
Total Cost for Method 1 : (50 * 200) + (10*400)
= $14,000
Total Cost for Method 2 : (20 * 200) + (40*400)
= $20,000
Total Cost for Method 3 : (10 * 200) + (70*400)
= $30,000
Answer:
(i) Method 1
(ii) Method 1
Explanation:
(i) Let L denote units of labor and C denote units of capital. Initially, the cost function for each method is given by the following expression:
[tex]M_i = \$100*L_i+\$400*C_i[/tex]
Applying the given values for all three methods, the one with the lowest cost should be picked:
[tex]M_1= \$100*50+\$400*10\\M_1 = \$9,000\\M_2= \$100*20+\$400*40\\M_2 = \$18,000\\M_3= \$100*10+\$400*70\\M_3 = \$29,000[/tex]
Therefore, Method 1 should be picked.
(ii) If the cost of labor rises to $200/ unit:
[tex]M_1= \$200*50+\$400*10\\M_1 = \$14,000\\M_2= \$200*20+\$400*40\\M_2 = \$20,000\\M_3= \$200*10+\$400*70\\M_3 = \$30,000[/tex]
Method 1 is still the most cost attractive method.
