Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.70 each. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and drill operations.
Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling.
a. Which design should be adopted if 125,000 units are sold each year?
b. What is the annual saving over the other design?