Three methods can be used for producing heat sen­sors for high-temperature furnaces. The interest rate for the economic evaluation is 10% per year.

Question

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.

Answer 1

(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: