Best Wheels Bicycle Company is looking to automate production of a framing component and will need to purchase new frame fabrication machinery. The company has narrowed the selection to 2 machines that have a useful life of 3 years. The company operates 8 hours a day, 200 days a year. Also provided below are forecasted demand for the next three years for the four models of bicycles the company produces, the cost to purchase, and the hourly operating cost. Provide year by year analysis for the next three years. Which machine would you recommend be purchased and why?
To determine which machine should be purchased, we need to perform a year-by-year analysis for the next three years based on the provided information. To compare the machines, we will calculate the total cost of ownership for each machine over the 3-year period.
First, let's calculate the total operating hours per year for the company. Since the company operates 8 hours a day and 200 days a year, the total operating hours per year would be:
8 hours/day * 200 days/year = 1600 hours/year
Next, let's calculate the total operating hours over the 3-year period:
3 years * 1600 hours/year = 4800 hours
Now, we can calculate the total cost of ownership for each machine. The total cost of ownership consists of the purchase cost and the operating cost over the 3-year period.
Machine 1:
- Purchase cost: $60,000
- Hourly operating cost: $30
To calculate the operating cost over the 3-year period, multiply the hourly operating cost by the total operating hours:
$30/hour * 4800 hours = $144,000
Total cost of ownership for Machine 1:
$60,000 (purchase cost) + $144,000 (operating cost) = $204,000
Machine 2:
- Purchase cost: $90,000
- Hourly operating cost: $20
To calculate the operating cost over the 3-year period, multiply the hourly operating cost by the total operating hours:
$20/hour * 4800 hours = $96,000
Total cost of ownership for Machine 2:
$90,000 (purchase cost) + $96,000 (operating cost) = $186,000
Based on the total cost of ownership, Machine 2 would be recommended for purchase. It has a lower total cost of ownership compared to Machine 1 over the 3-year period.
Please note that this analysis is based solely on the cost aspect, and other factors such as machine reliability, performance, and maintenance should also be considered when making the final decision.