Question

Real Wood Furniture Company

Business has grown to the point that a bottleneck has formed at the point where 4-ft X 12-ft lumber core plywood sheets are cut to finish size. You have identified two automated panel saws that have identical capacity and may be able to keep up with production for the next ten years.

Saw One Saw Two

Purchase price - $110,000. $80,000

Shipping - 3,500. 1,000

Installation - 6,500. 4,000

Testing - 3,500. 4 500

Total - $123,500. $89,500

Maintenance - 12,000 yr. 14,900

Energy costs - 8,500 yr. 13,000

Rebuilding in 7th year - 25,000. 35,000

Disposal cost end of 10th year - 4,850. 6,000

1. Which saw would you purchase?

2. What would be the cost to operate the saw over the next 10 years for Saw One and Saw Two.

Answer 1

Calculation of Total cost during the life of 10 years:
Saw 1 = Initial total cost = $123500
Annual cost of Maintenance and Energy = 12000+8500 = 20500
For 10 years= 20500 * 10 = 205000
Rebuilding in 7th year = 25000
Disposal Cost at the end of 10th year = 4850
Total cost during life = 123500 + 205000+25000 - 4850 = $348650

Saw 2 : Initial total cost = 89500
Annual cost of Maintenance and Energy = 14900+13000 = 27900
For 10 years= 27900 * 10 = 279000
Rebuilding in 7th year = 35000
Disposal Cost at the end of 10th year = 6000
Total cost during life = 89500 + 279000+35000 - 6000 = $397500

1). Company should purchase Saw 1 because the total cost to be incurred during the life is less than the Saw 2.
2). Cost to operate over next 10 years :
Saw 1 = 205000+25000 = 230000
Saw 2 =279000+35000 = 314000