A manufacturing plant is planning to replace outdated equipment with more energy

Question

A manufacturing plant is planning to replace outdated equipment with more energy-ef?cient and environmental-friendly equipment. Two models are under consideration. Model A is sold for $159,000 and can produce at an optimum speed of 78 unit/hour. Model B is sold for the same price, but can produce at an optimum speed of 76 unit/hour. Model A requires 6 hours of maintenance for every 4300 units produced, while Model B requires 5 hours of maintenance for every 3300 units. The maintenance cost for both models is $100 per hour. The variable operating cost is $340 per hour for Model A and $290 per hour for Model B. Due to obsolete parts, there is a sunk cost of $2700 for model A and $1900 for Model B . If the price of the product is $150 per unit and the company expects to sell 145,000 units each year, which model should be selected?

Explanation / Answer

we can decide by calculating the cumulative cost occurring per product and we will choose which ever is profitable proceeding through model A the no of working hours in model A = 145000/78 =1858.97 hrs/year in model B =1907.89 hrs/year maintanance cost in model A =202.32 hrs * 100 $ =20232 $ in model B =219.69 hrs *100 =21969 $ total variable cost in model A =145000*340 =49300000 in model B =42050000 sunk cost will be a income hence should be deducted. so net cost occured with model A = 159000+20232-2700+49300000 =49476532 $ model B =159000+21969-1900+42050000=42229069 $ from the above it is clear the cost incurred will be much less in model B and going with model B will decrease the cost by 7247463 $ /year cheers :)

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