Excalibur Plastics, Inc., is currently producing a resin for the toy market cent

Question

Excalibur Plastics, Inc., is currently producing a resin for the toy market centered in the New York-New Jersey area. The present batch reactors are old. New reactors must be purchased in the near future to replace the old equipment. In order to meet market demands, 100,000 lb/day must be produced. Batch reactors similar to the ones currently in use are estimated to have an installed cost of $150,000 each. A typical batch reactor is stainless steel, jacketed, agitated with a temperature recorder, pressure recorder, and control valves. A heating medium used is chlorinated biphenyl vapor to achieve the desired temperature One batch kettle has a capacity of 10,000 lb resin per 10 hr polymerization cycle but it takes another 2 hr between batches for discharging, cleanup, and recharging the reactor for the next cycle. Depreciation may be taken as 5 years straight-line. The labor cost is estimated to be 50 cents/lb resin produced. Raw matcrial and other dircct cxpenses are estimated to be $1.20/lb resin. Fixed costs per batch are S25.00 per batch reactor per day, assuming 340 operating days per year The Gelt Company of Hottentot, New Jersey offers for sale a continuous reactor package with automatic controls at an installed cost of $500,000 cach. This reactor is stainless steel and is capable of producing 25,000 lb resin per day. The labor expenses are expected to be 25 cents/lb resin produced. Raw material and other variable expenses are expected to be $1.20/lb resin. Note that this is the same as for the batch reactors. The other fixed costs on each continuous reactor are expected to be $35/day operation. Interest on capital borrowed for the reactors must be considered as an expense in the initial selection of the new production equipment. Invested money is worth 10%/yr to the company Summarize vour decision based on one day Batch Daily Production Daily production Continuous Batch Raw material and other expenses Variable expense Labor expenses Depreciation Fixed expenses Interest on capital Total operating expenses Continuous ound of resin Total investment required Number of reactors required

Explanation / Answer

Calculation of Total cost of reactors for one day :

Continuous Reactors

(Quantity 25000lb resin per day) (Amount in $)

Batch Reactors

(Quantity 20000(1) lb resin per day) (Amount in $)

34000

Note: 1) batch per day get produced as 20000 as in 12 hours 10000 recators are produced.

2) Depreciation = 150000/5=$30000 per year and per day = 30000/340= 88

(a) Company should purchase Continuous reactors as it is less costly than Batch Reactors.

(b) Total annual saving =(1.7069-1.473=0.2339per day saving

Per year saving totally = 0.2339* 340=$79.526 per lb/resin

(c) 10 batch reactors totally sold at = 10*20000= $ 200,000

Yes, these batch reactors are now to be replaced by continuous reactors as it costs less and there is profit in batch reactors sale.

d) If the company decided to execute the project then it should take loan of (36250*340)+ 500000 (expenses+ installation charges)=12825000. Project duration should be chosen according to the feasibilty of the situation and loan should be paid accordingly wich reduces the interest cost minimum as result.

Particulars

Continuous Reactors

(Quantity 25000lb resin per day) (Amount in $)

Batch Reactors

(Quantity 20000(1) lb resin per day) (Amount in $)

Variable Cost Raw material cost and other expenses @1.2/ lb resin 30000 24000 Labor cost 6250(@0.25) 10000(@0.50) (a) 36250

34000

Fixed Expenses Fixed expenses 35 50(25*2 batches) Depreciation 88 (b) 35 138 Total cost (a+b) 36285 34138 Per lb/resin per day 36825/25000=1.473 34138/20000=1.7069

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