4. Problem 3.51 in Duncan and Reimer. You buy equipment for $523,000 that has a

Question

4. Problem 3.51 in Duncan and Reimer. You buy equipment for $523,000 that has a capacity of 340 kg/week of formula X. The equipment operates 50 weeks per year, there are one-week maintenance periods every 6 months. Formula X sells for $28.7/kg. The production costs (reactants, labor, electricity, maintenance, repairs, etc.) are $11.4/kg Rent, insurance, and miscellaneous fees are $62,500/year a. Calculate the profit and return on investment (ROI Assume a straight-line depreciation with a lifetime of 10 years. (6 pts) b. A key part on your equipment breaks once a year, on average. When you purchased the equipment for $523,000 you also purchased a spare part for $24,900 (total capital cost - $547,900). t takes one week to replace the part, during which no formula X is produced. The additional costs (include as operating costs) for each repair are $31,200 ($6,300 for labor plus $24,900 for a new spare part to replace the part in inventory). Calculate the profit and ROI during a year in which the part is replaced once. (6 pts) Because you know the key part will fail every year or so, you decide to avoid any production interruptions by replacing the part during the biannual one-week maintenance periods. Because the equipment is disassembled for maintenance there is no additional labor to replace the part. The cost of replacing the part is only the price of the part, $24,900 (to be included as an operating cost). Assume again that you chose to purchase one spare part to have on hand (total capital cost $547,900). Calculate the profit and ROI for replacing the part twice a year during the normal maintenance periods. (6 pts) c. d. Instead of purchasing the spare part ahead of time (total capital cost - $523,000), you decide to replace the part only after it fails, but with a different strategy. When the equipment fails, the first two days of repair are spent disassembling the equipment and removing the broken part. Instead of having the spare part on hand, you decide to rush-order the part when it fails. The rush order costs $24,900 for the part plus $1,000 for special rush delivery. Calculate the profit and ROI for this just-in-time strategy during a year when the part is replaced once. (6 pts) A different manufacturer also sells a process to produce 340 kg/week of formula X. However, her equipment has been proved to never fail during its lifetime. This superior piece of equipment costs $725,000. All other parameters are as stated in part (a). Which has the better RO, (b), (c), (d), or (e)? (6 pts) e.

Explanation / Answer

a. CALCULATION OF PROFIT & ROI Cost of equipment $523,000 Useful life in years 10 Salvage value $0 Annual depreciation $52,300 (523000/10) Total production in Kgs 17000 (340*50) Sales price per kg $28.70 A Annual Sales Revenue $487,900 (17000*28.7) Production cost per Kg $11.40 B Annual production cost $193,800 (17000*11.4) C Rent Insurance & misc fees per year $62,000 D Depreciation expenses $52,300 P=A-B-C-D Profit $179,800 R=P/523000 ROI(Return on investment) 0.343785851 ROI(Return on investment) in percentage 34.38% b E Additional cost of repair $31,200 Total Capital cost $547,900 P1=P-E Profit $148,600 R1=P1/547900 ROI 0.271217375 ROI(Return on investment) in percentage 27.12% c. Total Capital cost $547,900 F Additional cost of repair $24,900 P2=P-F Profit $154,900 R2=P2/547900 ROI 0.282715824 ROI(Return on investment) in percentage 28.27% d JUST IN TIME STRATEGY Total Capital cost $523,000 G Additional cost of repair $32,200 (25900+6300 for labor) P3=P-G Profit $147,600 R3=P3/523000 ROI 0.282217973 ROI(Return on investment) in percentage 28.22% e Cost of equipment $725,000 Useful life in years 10 Salvage value $0 Annual depreciation $72,500 Total production in Kgs 17000 Sales price per kg $28.70 Annual Sales Revenue $487,900 Production cost per Kg $11.40 Annual production cost $193,800 Rent Insurance & misc fees per year $62,000 Depreciation expenses $72,500 Profit $159,600 ROI(Return on investment) 0.220137931 ROI(Return on investment) in percentage 22.01% Better ROI:c C has the highest ROI

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