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A short class with Sarah and her students. The other ways are under More.
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Today, let's delve into how we calculate downtime costs per hour for machinery. Can anyone tell me what the downtime cost is based on?
Is it based on the equipment cost?
Exactly! The downtime cost is a percentage of the equipment cost. If our equipment costs 900 rupees per hour, what do you think is the downtime cost at 3%?
That would be 27 rupees per hour.
Great! Now, if the machine runs for 2000 hours a year, how much would be the total yearly downtime cost?
It would be 54,000 rupees!
Correct! Remember, for calculations like these, we often use a mnemonic: 'Down Time Means Cost' or DTMC to remember how downtime affects costs.
That's helpful! So, are we going to look at the next year's costs too?
Yes, absolutely! We're building a cumulative cost model. Let's transition to how we adjust these costs for the second year.
In the second year, the downtime percentage changes to 6%. If our equipment cost remains 900 rupees, how do we find the new downtime cost?
We can calculate it by taking 6% of 900 rupees.
Right! What does that come to?
That would be 54 rupees per hour.
Perfect! Now, if we operate for another 2000 hours, how much is our total downtime cost for the year?
It would be 1,08,000 rupees.
Well done! Now, how do we calculate the cumulative downtime cost at the end of two years?
We add both yearly costs, so 54,000 plus 1,08,000 would equal 1,62,000 rupees.
Exactly! Now, let's look at how we calculate the cumulative cost per hour using these totals.
Now that we have cumulative costs, let’s explore productivity adjustments. What happens if we lose some productivity alongside our downtime?
It means we might need to spend more to bring productivity back up!
Well said! If our productivity factor is 0.98, how would we calculate the productivity-adjusted cumulative cost for the second year?
We would take 40.5 rupees and divide it by 0.98, right?
Exactly! So what does that amount to?
That's about 41.33 rupees.
Great job! And what would be the productivity-adjusted cumulative cost for year three with a factor of 0.95?
That would be around 65.25 rupees, I think.
Yes, that’s perfect! Understanding these adjustments is crucial for cost management.
Finally, let's discuss obsolescence costs and their impact. What is obsolescence?
It's when an old machine loses value over time due to being outdated or less productive.
Exactly! For our calculations, let’s say the obsolescence factor starts at 0.05. What’s the obsolescence cost for the second year?
That would be 45 rupees per hour.
Right! Now, how do we ascertain the yearly obsolescence cost from that?
By multiplying that by 2000 hours, which gives 90,000 rupees.
Correct! Now, let’s calculate how we combine this obsolescence cost into our cumulative calculations.
Calculated as a percentage of equipment costs and impacts financial analysis.
An accumulation of yearly costs that helps in understanding the financial viability over time.
The increasing cost related to aging machinery that doesn't perform as well as competitors.
Adjustment for productivity losses that can skew the true cost of operating machinery.
To calculate downtime, just take your cost, / Percent and hours mean money lost.
Imagine a farmer reliant on an old tractor. As time passes, more repairs and downtime stack up, while newer tractors are available, illustrating obsolescence.
Remember 'C-D-P-O': Cumulative Costs, Downtime Costs, Productivity Adjustments, Obsolescence.
Use the acronym DCO to remember: Downtime Cost, Cumulative Cost, Obsolescence.
Term
What is the hourly downtime cost at 3% of equipment cost?
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Term
What is cumulative downtime cost after second year?
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Term
What factor adjusts cumulative costs due to productivity loss?
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Term
What is the obsolescence cost at a factor of 0.05?
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The cost incurred when machinery is not operational, often calculated as a percentage of the equipment cost.
The total cost accumulated over time from various expenses, including downtime and obsolescence.
The cost related to the decline in value of machinery as it becomes outdated or less productive.
A numerical value representing the output efficiency of a machine, often adjusted for downtime costs.
This section explains the calculation of cumulative costs per hour related to machinery downtime and obsolescence over multiple years.
The section details how downtime costs are calculated based on equipment costs and percentage factors, illustrating the changes over subsequent years. It also highlights the importance of productivity loss and obsolescence costs in determining the economic life of machinery, paving the way for effective replacement strategies.
In this section, we explore the concept of cumulative costs associated with machinery downtime and obsolescence. Downtime cost is computed as a percentage of the equipment cost, which in this case is 900 rupees per hour. For the first year, at a downtime rate of 3%, the hourly cost comes to 27 rupees, accumulating to a yearly downtime cost of 54,000 rupees for 2000 operational hours. In the second year, this cost escalates to 54 rupees per hour (6% downtime), totaling 1,08,000 rupees. The cumulative downtime cost is established by summing the annual downtime costs across years leading to the calculation of the cumulative cost per hour for each year. Furthermore, productivity losses adjust these cumulative costs, and a new cost metric is introduced for productivity-adjusted costs. As machines age, obsolescence costs add further complexity to cost calculations. Understanding these dynamics allows equipment owners to determine when to replace their machinery to optimize operational efficiency and minimize costs.