Three methods can be used for producing heat sensors for high-temperature furnaces. The interest rate for the economic evaluation is 10% per year.
Method A: Fixed cost of $140,000 per year
Production cost of $62 per part
Method B: Fixed cost of $210,000 per year
Production cost of $28 per part
Method C: Equipment first cost of $500,000
Life of 5 years
Salvage value of 25% of first cost
Production cost of $53 per part
(a) Determine the breakeven annual production rate between the two lowest-cost methods.
(b) Develop the spreadsheet graph of the annual cost for all three methods and estimate the breakeven production rate(s) from the graph.
(c) Use your spreadsheet and graph to determine the required annual fixed cost of method A that forces a breakeven between methods A and C at the rate of 2000 parts per year.
(a) Fixed cost, C: FCC = -500,000(A/P,10%,5) + 0.25(500,000)(A/F,10%,5)
= -500,000(0.2638) + 0.25(500,000)(0.1638)
= $-111,425 per year
Method A has a higher fixed cost and higher variable cost than Method C.
Eliminate A and find breakeven between B and C
Let x = number of parts per year
-210,000 - 28x = -111,425 - 53x
x = 3943 parts/year
(b) Plot annual cost curves. Breakeven is only between B and C at slightly less than 4000
parts/year.
(c) Make the fixed cost for method A the variable (cell A14). Use Goal Seek to force the
annual costs to be equal at 2000. The new annual fixed cost for method A is $-93,424.
Plot all three curves. Now, breakeven conditions are:
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