Question

Your company buys a piece of equipment for a cost of 225k including tires. Freight costs are 4k. Tire replacement costs 25k and lasts 4000 hours. The equipment has a total life of 10000 hours and the plan is to use it 1000 hrs per year. Fuel costs 2.35 per gallon and equipment usage is 5gal/hr. The equipment will be used for 5 years and sold for 100k. Company overhead and interest is 20%. Determine he total ownership and operating cost.

Answer 1

From the details , it is understood that there are two requirements made. Let's find the details of requirements made as below.

A) Ownership cost- Owner ship cost means total cost incurred in aquaring an asset including all other costs incurred to use the asset for a specific period. The owner ship cost that have incurred for an asset after its sales will be Total of acquisition and all other costs less The value obtained from the sale of the asset.. That is total value of amount spent on completely aquaring the asset and use it for a specific period. This cost will include the costs such as value of assets, the cost of installation of assets, transportation cost of asset, Lobour costs associated with the elements specified above, costs of tires, its replacement and labour costs associated with it and all other costs related with the asset for a specific period of time.

B) Operating Cost- The operating cost associated with an asset is the total cost which would incur to operate such an asset for a period of time. These Costs are labour, fuel , maintenance etc. It should be noted that those expenses which would not directly related to production is not treated as operating cost of an asset or machinery. Its because no such costs have incurred for the operation of machinary or productions. Therefore the overhead along with 20% of interest is not considered for further computation as not details linking the aforesaid asset to such Costs are provided in the requirements details.

Let's list all the costs associated with aquisition of the asset or machinery.

a)The cost of equipment including Tires= 225,000

b) Freight Cost= 4,000

c) Tire replacement cost including lab our for 4000 hrs(as per the details) =25,000

These at the costs which may be considered as ownership cost or the auqisition cost of the equipment with respect to the definition given above.

Therefore , the total Acquisition cost initially will be the total of all elements which contributed for the acquisition of the asset.

I.e = Equipment cost+Freight+ Tire replacement cost

I.e= 225,000+4000+25000

I.e =254,000

Now let's list all costs associated with operating the equipment for one year with respect to the degnisition given above.

a)Given that,

Fuel cost=2.35/ gallon

b)Requirment of fuel / Hour= 5gal/Hr

Therefore cost of fuel/ hr will be

Cost per gallon* gallon required /hr

I.e= 2.35*5

I.e =11.75

Given that the equipment will be used for 1000 hours per year. Therefore cost of fuel for one year will be equal to

Total hours of operation*Cost/Hr

I.e=1000*11.75

I.e =11,750

Given that equipment will be used for 5 years. Therefore total fuel cost for 5 years will be equal to

Cost of fuel for 1 year* 5 years

I.e = 11750*5

I.e = 58,750

No details of any other operating cost is provided at details. Therefore the operating cost of equipment for 5 years is 58,750

Now the owner ship cost for 5 years may be defined as below.

Cost of acquisition of Asset+ over head and interest (of aquisition cost)+operating expenses for 5 years

I.e= 254,000+(254,000*20%)+58,750

I.e =363,550

As per the definition above, the cost which may be treated as the ownership cost after the sale of an asset will be equal to

Total ownership for 5 years-Value earned on sales

I.e= 363,550-100,000

I.e= 263,550