A manufacturing plant is planning to replace outdated equipment with more energy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A manufacturing plant is planning to replace outdated equipment with more energy-efficient and environmental-friendly equipment.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 $346 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 . Assume the price of the product is $150 per unit and the company expects to sell 145,000 units each year. From the context of comparing Model A vs. Model B, what would be the cost of going with Model A for 145,000 units/year. A manufacturing plant is planning to replace outdated equipment with more energy-efficient and environmental-friendly equipment.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 $346 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 . Assume the price of the product is $150 per unit and the company expects to sell 145,000 units each year. From the context of comparing Model A vs. Model B, what would be the cost of going with Model A for 145,000 units/year.

Explanation / Answer

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

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