Replace or Maintain? In our enterprise we operate a mixing tank that is 18 years
ID: 462751 • Letter: R
Question
Replace or Maintain?
In our enterprise we operate a mixing tank that is 18 years of age. Maintenance records for the last 12 months show that parts and labor expenses, including overtime premiums, required to repair this unit amounted to $43,960. Fortunately, the repairs were made during non-operating hours and downtime was not experienced.
Downtime has a cost of $6,000 per hour.
Our current operating schedule is 6 days per week, two shifts, 8 hours per shift, 50 weeks per year.
The existing tank requires a crew of 3 operators being paid wages of $15.60 per hour, plus an additional 37% for benefits.
A new blending tank assembly has a purchase price of $587,000. Installation labor is estimated to be an additional $50,500. The new equipment has an economic (Accounting) life of 10 years (divide purchase price plus installation by 10).
The replacement unit can be operated by 2 workers versus 3 for the existing unit.
Energy costs for the replacement unit will be approximately $130 per day less than the existing unit.
Calculate the cost per year to operate the existing mixing tank and the annual cost to operate the proposed new tank.
What is the difference in annual operating costs between the two alternatives?
What decision would you make? Keep old tank or purchase a new tank?
Explanation / Answer
Given Information:
Repair Cost = $43,960 (done in non – operating hours)
Downtime cost = $6000/hour
Schedule = 6days/week, 2 shifts, 8 hours/shift, 50 weeks/year;
Working Hours = 6*2*8*50 = 4800 hours
Existing Tank New Blending tank
3 Operator 2 operators
Wages = $ 15.60/hr
Additional benefits = 37%
I. Alternative – cost of existing tank
3 operators cost = 3*15.6 =$45.8
37% benefit = .37*45.8 = $ 16.95
Total operator cost = $62.75/hr
For a year = $ 62.75 * 4800 hrs = $ 301200
Repair cost = $ 43960
Overall cost of existing tank = $ 345160
II. Alternative – Purchasing a new Tank
Purchase price = $ 587,000
Installation cost = $ 50,500
Total of these two = $ 637,500
2 operator’s cost = $ 15.60*2 = $ 31.20
Add. Benefits (@37%) = $11.54
Total operator’s cost = $ 42.74 per hr
For a year = $ 42.74*4800 = $ 205152
Overall cost of purchasing a new tank = $842652
After comparing both the alternatives cost, it was decided that alternative I ( Existing Tank) is cheaper.