A Local Business Owner Is Considering Adding Another Employee to His

question 83

Essay

A local business owner is considering adding another employee to his staff in an effort to increase the number of hours the store is open per day.
a. If the employee will cost the owner $4,000 per month and the store takes in $50/hour in revenue with variable costs of $15/hour, how many hours must the new employee work for the owner to break even?
b. The employee again costs $4000 and has agreed to work 120 hours. If variable costs remain at $15/hour and revenue is uncertain with a 40% chance of being $40/hour, 35% chance of being $20/hour, and 25% chance of being $35/hour should the owner hire the employee?

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Definitions:

Conversion Costs

The combined costs of direct labor and manufacturing overhead incurred to convert raw materials into finished products.

Downstream Costs

Expenses incurred after the manufacturing process, such as distribution and marketing.

Work in Process Inventory

Items or goods that are partially completed in the production process but are not yet finished products.

Manufacturing Costs

The expenses involved in producing goods, including labor, materials, and overhead.