Maintenance Cost Analysis.

Cool Aire has been experiencing problems in the final assembly of its air conditioner operations. The conveyor that carries the compressors to final assembly periodically stops, and this effectively shuts down the entire plant. Variable costs per unit approximate $100, and each unit sells for $160. Because it is now the peak period for sales, any unit not manufactured results in a unit not sold. Each unit has a cycle time of .6 minutes, i.e., one unit is produced every .6 minutes.

Down time averages 80 minutes per day, and the 200 workers receive $15 per hour in wages and benefits. Labor is a variable cost for this company.

Required:

a. Compute the daily cost of idle labor.

b. Compute the daily lost contribution margin because of the down time.

c. Assume the company spends a cash lump sum of $100,000 and an additional $120,000 per year to reduce daily down time to ten minutes. Compute the annual profit effect of this expenditure if the initial investment is written off over five years. Assume Cool Aire operates 250 days per year.