Question

Case study 5: A piece of automated production equipment has a first cost of $120,000. The service life is 6 years, the anticipated salvage value is $10,000, and the annual maintenance costs are $4000. The equipment will produce at the rate of 10 units/h, each unit worth $2.20 in added revenue. One operator is required full time to tend the machine at a rate of $14.00/h. Assume that no overhead rates are applicable. Raw material costs equal $0.3/unit. Use a MARR of 12%. a. Draw the cash flow of the purchase of the machine (1.5 pts) b. Compute the profit break-even point. (4.0 pt) c. How many hours of operation are required to produce the number of units indicated by the break-even point? (1.5 pt) d. How much profit (or loss) will be made if 60,000 units/yr are produced? (1.5 pt)

Answer 1

a)Cash flow of machinery:

Cash Flow of Purchase of Machine:	Amount(in$)
Initial Invest ment at the beginning of the year	120000
Amc at end of every year for 6 years
+4000*Pvfactor@12%
+4000*4.1111	16444
	136444

b) Profit break even point :

Break-even point is the number of units (N) produced which make zero profit.

Revenue – Total costs = 0

Total costs = Variable costs * N + Fixed costs

Revenue = Price per unit * N

Price per unit * N – (Variable costs * N + Fixed costs) = 0

So, break-even point (N) is equal

N = Fixed costs / (Price per unit - Variable costs)

In the given problem price per unit is 2.20$

Variable cost per unit is :

Raw Material cost per unit 0.3$

Operator Cost per unit 1.4$

(per hour operator cost is 14$

For one hour machinery produces 10 Units

so per unit operator cost =14$/10=1.4$)

Total Variable cost per unit 1.70$

Fixed cost are as follows:

Initial investment 120000$

Annual Maintenance cost 4000$

Interest cost @12% on 120000$ 14400$

Total fixed cost 138400$

Break Even Units = Fixed costs / (Price per unit - Variable costs)

=138400$/(2.20$-1.7$)

=138400$/0.50$

=276800 units

c)Hrs required to produce break even units =276800*10hrs=2768000hrs