The time has come to evaluate cost justify a new piece of eq

The time has come to evaluate (cost justify) a new piece of equipment for our production line. Your mission is to determine whether. or. not to purchase replacement equipment based upon the numbers given below. 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

Solution

1 statement showing calculation and comparison of total cost usin existing and new equipments PARTICULARS EXISTING EQUIPMENT PROPOSED EQUIPMENT DIFFERENCE LABOUR COST 166688.55 78624 - (Working note 1) ADD OVERHEADS MACHINE OVERHEADS (Working note 2) 13000 42000 - ENERGY (NRG CONSUMPTION) (Working note 3) 18980 5460 - TOTAL COST 198668.55 126084 72584.55 (ASSUMPTION :- It is assumed that the material and other overheads costs are remain constant in both of the cases) Working note 1 computation of labour cost A. for existing equipments (In dollars) Particulars amount Normal wages 112320 ([2080 hours * 2 employees * $ 13.50 per employee] * 2 shifts) add overtime wages 6743.25 [333 hours in total *(13.50 * 150%)] total wages 119063.25 add employee benefits 47625.3 ( 40% of total wages above) total labour cost 166688.55 B. for Proposed equipments (In dollars) Particulars amount Normal wages 56160 ([2080 hours * 1 employee * $ 13.50 per employee] * 2 shifts) add overtime wages 0 [0 hours in total *(13.50 * 150%)] total wages 56160 add employee benefits 22464 ( 40% of total wages above) total labour cost 78624 Working note 2 Machine overheads PARTICULARS EXISTING EQUIPMENT PROPOSED EQUIPMENT Maintenance costs 13000 12000 add Depreciation costs 0 30000 ( for proposed equipment:- 240000 / 8 years) Total machine overheads 13000 42000 Working note 3 NRG consumption costs PARTICULARS EXISTING EQUIPMENT PROPOSED EQUIPMENT A NO OF OPERATING DAYS IN A YEAR 260 260 (2080 Hours / 8 hours per operating day) B Rate of NRG Consumption per operating day (Given) 73 21 C Therefore; total NRG consumption cost 18980 5460 (C = A * B) FINAL ANSWER (CONCLUSION AND DECISION) AS WE CAN OBSERVE FROM ABOVE STATEMENT THE PRODUCTION COST USING CURRENT EQUIPMENTS IS HIGHER BY $ 72544.55 THAN PROPOSED EQUIPMENT AND HENCE IT IS SUGGESTED TO GO FOR NEW PROPOSED EQUIPMENTS FOLLOWING ASPECTS MUST ALSO BE CONSIDERED ALONG WITH ABOVE FINANCIAL ASPECTS 1. Employee adaptibility for new equipments 2. Employee training and other costs 3. Finance for opting new equipments etc