Question

In the following situation, should one machine be purchased and operated 24   hours a day, or should three machines be bought and operated 8 hours?

1. The machine cost $ 120000 with an economic life of 10 years.
2. The 24 operation is really only 95% efficiency because of maintenance and repair activities.
3. Labor is paid in full no matter how many hours they work in each shift.
4. First shift operators get $ 12, second shift operators get $ 14, and third shift operators get $ 16.5 per hour.

Answer 1

We will calculate the total cost in 10 years.

Option 1. 24 hour operation with one machine

Initial Cost : $120000

Per day labour cost =12+14+16.5 = $42.5

Adding the inefficiency factor the per day labour cost = $42.5/.95=44.73

Let us assume a total of 3650 days machine will operate in 10 years.

Then total labour cost = 3650*44.73=$163264

Total Cost = 120000+163264= 283264

Option 2. 8 hour each machine with three machine

Initial machine cost = 360000

Labour cost = $12 per day * 3 labour = $36

Labour cost for 10 year=3650*36=131400

Total Cost = 360000+131400=$ 491400

Therefore, it is far cheaper to have one machine and operate it for 24 hours even if it is 95% efficient as the labor cost is low and the machine cost is very high. Therefore one machine option is more suitable.