Existing Equipment: Depreciation Cost Per Year = -0- (fully depreciated) Mainten

Question

Existing Equipment:

Depreciation Cost Per Year = -0- (fully depreciated)

Maintenance Cost = $13,000 per year

Operator Labor = 2 people per shift, $13.50 per hour, 2080 hours worked per person, 2 shifts of operation @ 8 hours each

Grand Total Overtime Hours = 333 per year

Employee Benefits = 40% of all wages

NRG Consumption = $73 per operating day

Note: Overtime hours are paid at a rate of 150% of regular pay for hours over 8 per shift.  

Proposed Equipment:

Depreciation Cost Per Year of Proposed Equipment = Purchase price of $240,000; economic life of 8 years

Maintenance Cost = $12,000 per year

Operator Labor = 1 person per shift, $13.50 per hour, 2080 hours worked per person, 2 shifts of operation @ 8 hours each

Grand Total Overtime Hours = -0-

Employee benefits = 40% of all wages

NRG Consumption = $21 per operating day

Answer the following:

1. What is the total cost difference, per year, for operating the replacement equipment versus the existing equipment?

1a. Replacement = $

1b. Existing = $

1c. Difference = $

2. What other consideration must you give to making the decision to keep or replace existing equipment?

Explanation / Answer

2. Other factor to consider to make the decision,

I) Final quality of product

II) Other Utility cost like steam or water if any

III) Interest cost on capital

IV) Space require for new machine

Existing Proposed No of operating day (2080/8) 260 260 Depriciation 0 30000 (240000/8) Maintenance cost 13000 12000 Labor cost
Existing 2 shift 2 labor 2080hrs/yr (2080*2*2*13.5)
Proposed 2 shift 1 labor 2080hrs/yr (2080*2*1*13.5) 112320 56160 Overtime (150% of regular pay)
(13.5*333*1.5) 6743 0 Employee Benefit (40% of all wages) 47625 22464 NRG consumption (NRG/day*no of day) 18980 5460 Total Cost 198669 126084 1. Total Cost Difference 1 a. Replacement 126084 1 b. Existing 198669 1 c. Difference 72585

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