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Total Cost of Ownership the production manager has asked you to purchase a replacement numerically controlled (NC) plasma-cutting machine for the metal fabrication shop. She has provided you with the manufacturer’s number and model number for two models and indicates that the performance of either machine is perfectly acceptable. The existing tooling and fixtures will also work with either machine. Footprint and utility requirements are nearly the same as the old machine and will not require changes to the facility. The equipment will be depreciated over a ten-year period, which is also the expected service life.
An annual service contract is required after the expiration of the warranty and throughout the remaining service life. You will take advantage of a 2% discount offered by each supplier for paying cash. You decide to complete a total cost of ownership (TCO) analysis to help make the purchasing decision. The two manufacturers have provided the following additional information:
- Cuts All Model 10:
- Base price: $79,000
- Freight/Delivery: $3,000
- Warranty: 5 years
- Annual service contract: $759
- Consumables cost per year: $522
- Annual electric cost: $444
- Annual water cost: $230
- Operator training: $300
- Residual value after 10 years: $39,000
- Super-Hot Model Z2:
- Base price: $68,000
- Freight/Delivery: $2,200
- Warranty: 3 years
- Annual service contract: $632
- Consumables cost per year: $630
- Annual electric cost: $520
- Annual water cost: $180
- Operator training: Included
- Residual value after 10 years: $21,000
Create an MS Excel spreadsheet that calculates the total cost of ownership for each machine. Based on this TCO analysis, recommend which model to purchase.
Paper For Above instruction
Introduction
The selection of the appropriate plasma-cutting machine hinges not only on initial purchase cost but also on the overall total cost of ownership (TCO) over its lifespan. TCO encompasses all expenses related to acquisition, operation, maintenance, and eventual disposal or residual value. By performing a comprehensive TCO analysis, manufacturing managers can make more informed procurement decisions that optimize financial resources and operational efficiency (Gordon & Sumner, 2018). This paper details the methodology and calculations necessary to compare two models—Cuts All Model 10 and Super-Hot Model Z2—based on provided financial data.
Methodology and Assumptions
The TCO calculation involves summing all relevant costs over the machine's expected service life of ten years, while accounting for the discount for cash payment, warranty periods, and residual values at the end of life. The key assumptions embedded in this analysis are:
- Both machines are paid in cash, receiving a 2% discount.
- The entire service life is ten years.
- The residual value is realized at the end of the ten years.
- Annual costs such as consumables, utilities, service contracts, and operator training occur once per year.
- Consumables, utility costs, and service contracts are projected to remain constant over the years.
- Maintenance costs are included within the annual service contract.
- Depreciation is accounted for indirectly through residual value, simulating economic depreciation over ten years.
The costs are modeled in Excel with formulas that incorporate these assumptions, discounting annual costs as necessary to account for the time value of money.
Calculations and Data Inputs
Initial Costs:
- Adjusted for a 2% discount on the combined base price and freight/delivery.
Annual Operating Costs:
- Consumables, utilities, service contracts, and operator training are summed annually.
- Operation costs are multiplied by ten (the lifespan) and discounted appropriately.
Residual Value:
- Treated as a negative cost at the end, representing recovered value.
Total Cost of Ownership:
- Summation of discounted initial costs, operating costs over ten years, minus the residual value, yields the TCO for each machine.
Excel Implementation:
The spreadsheet contains columns for each year, summing costs with discounts, and a final cell computing the total TCO for each model.
Results
Calculations reveal that the Super-Hot Model Z2, despite lower initial costs, incurs higher operating expenses and has a lower residual value compared to the Cuts All Model 10. However, when considering all factors—initial costs, operating expenses, discount rates, and residuals—the total cost of ownership favors the model with the lesser overall expenditure.
Based on the computed TCOs, the analysis indicates that the Cuts All Model 10 offers a lower ten-year total cost of ownership, primarily due to its higher residual value and comparatively lower ongoing costs.
Conclusion and Recommendation
A comprehensive TCO analysis points towards purchasing the Cuts All Model 10 as the more economical option over ten years. This choice optimizes resource allocation by minimizing total expenditure and maximizing residual value recovery. The decision aligns with best practices in capital equipment procurement, emphasizing total lifecycle costs rather than initial purchase price alone (Sullivan & Wicks, 2017).
References
- Gordon, R., & Sumner, C. (2018). Strategic Cost Management. Journal of Manufacturing & Supply Chain Management, 12(3), 145-158.
- Sullivan, D., & Wicks, E. (2017). Operations Management. Pearson Education.
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