Please show work!! Two machines are being considered for the production of landi
ID: 2749625 • Letter: P
Question
Please show work!!
Two machines are being considered for the production of landing gears for Cessna Aircraft Co. Machine 'A' has an initial cost of $1,000,000 with a variable production cost of $100/hour. The machine is expected to last 6 years. Machine 'A' requires resetting work that will cost $30,000 after every 1000 hours. Machine 'B' has an initial cost of $2,000,000 with a variable production cost of $10/hour. The machine is expected to last 9 years. The resetting work on Machine 'B' costs $ 10,000 after every 3000 hours. How many hours per year must the machines be used to justify the more expensive equipment?Explanation / Answer
Answer:
Machine-A cost = $1,000,000
Life of machinery = 6 years
Resetting cost = $30,000 after every 1000 hours
Variable production cost = $100 per hour ; this is the output the machine A gives
Now Total depreciation on Machinery-A in a year = $1,000,000 / 6 = $166,666.67
Therefore $166,666.67 is what needs to be recovered by the Machine-A
Also total Hours in a year = 24 x 365 = 8760 hours
Resettings in a year = 8760/1000 = 8.76 resettings
So total resetting cost = 8.76 x $30,000 = $262,800
So total cost of machinery – A = $262800 + $166,666.67 = $429,466.67
Now if the output of the machine –A is $100 per hour then :
Number of hours to work in a year to recover initial cost = $429,466.67/$100 = 4294.67 hours
Machine-B cost = $2,000,000
Life of machinery = 9 years
Resetting cost = $10,000 after every 3000 hours
Variable production cost = $10 per hour ; this is the output the machine B gives
Now Total depreciation on Machinery-B in a year = $2,000,000 / 9 = $222,222.22
Therefore $222,222.22 is what needs to be recovered by the Machine-B
Also total Hours in a year = 24 x 365 = 8760 hours
Resettings in a year = 8760/3000 = 2.92 resettings
So total resetting cost = 2.92 x $10,000 = $292,000
So total cost of machinery – B = $29,200 + $222,222.22 = $251,422.22
Now if the output of the machine –B is $10 per hour then :
Number of hours to work in a year to recover initial cost = $251,422/$10 = 25,142.22 hours