Use Method 1 (combined depreciation and investment costs for ownership costs) to
ID: 1867056 • Letter: U
Question
Use Method 1 (combined depreciation and investment costs for ownership costs) to determine the probable cost per hour of owning and operating a rubber tire unit of equipment with a 250-hp diesel engine. The following conditions apply Factory delivered price-$450,000 Sales tax 5% of delivered price Unloading and assembling $2,500 Salvage value $120,000 Useful life 5 yr Hours used per year 1,500 hr Interest on investment-8% Maintenance and repairs-70% of straight-line depreciation Diesel engine 250 hp Operating factor 0.60 Fuel costs $4.00/gal Crankcase capacity- 8 gal Hours between oll Oil costs $16/gal Tires $55,000 Tire life 3,500 hr Tire repairs-10% of tire depreciation changes- 120 hrExplanation / Answer
SOLUTION.
Fuel consumed per hour = 250 hp*operating factor = 250hp*0.6 = 150 gallons/hour.
Net purchase price = factory delivered price(1+sales tax rate) + price of assembling = 450,000(1+5%) + 2500 = 475,000
Annual depreciation = (net price - salvage value)/5 = (475000-120,000)/5 = $71,000
Average cost formula = net price(n+1)/2n = 475,000(5+1)/2*5 = 285,000
Thus annual costs are:
1. Depreciation of $71,000
2. Maintenance and repair = 20% of 475,000 = 95,000
3. Investment = 8% of average cost = 8% of 285,000 = 22800
Thus total annual fixed costs = 71000+95000+22800 = $188,800
Hourly costs: Fixed cost/1500 hours = 188,800/1500 = $125.87 per hour
Tire depreciation = cost of tires/tire life = 55000/3500 = $15.71429 per hour
Tire repair = 10% of depreciation = 10% of 15.71429 = 1.571
Fuel cost = $4*150 = 600
Thus total cost per hour = 125.87+15.71429+1.571+600
= $743.15
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