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 cost per year to operate the proposed new tank.
What is the difference in total annual operating costs between the two alternatives?
What decision would you make? Keep old tank or purchase a new tank?