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Today we're going to explore how to calculate downtime costs for equipment. Can anyone tell me what downtime cost means?
Is it the cost incurred when the machine is not operational?
Exactly! Now, if the equipment costs 900 rupees per hour, and our downtime cost is 3% of that, how much would it be per hour?
That would be 27 rupees per hour!
Perfect! Now, if the machine operates 2000 hours a year, what would be the annual downtime cost?
54,000 rupees?
Right! Every year, we thus need to monitor how these costs accumulate. Let's move into year two.
In the second year, we increase our downtime percentage to 6%. Can anyone calculate the new downtime cost per hour?
It would be 54 rupees per hour.
Exactly! Now, if we assume a need to restore productivity post-downtime affects cost further, what could this look like?
Maybe we need more equipment or workers?
Great thinking! This necessitates the calculation of productivity adjusted cumulative costs. The cumulative cost increases with year two, emphasizing the importance of timely equipment replacements.
As we continue, let's touch on obsolescence costs. Can anyone detail what drives these costs?
Older machines become less productive and can incur higher maintenance costs?
Right! Obsolescence costs for year two and three increase as we hang onto older equipment. For example, how much should we expect to incur in obsolescence if the cost is assessed at 0.05 for year two?
That would be 45 rupees per hour!
Fantastic! Now, we will calculate how these costs accumulate further into third year operations and analyze the increase.
Understanding how downtime costs accumulate based on equipment costs and operational hours.
Observing the total costs over the economic life of machinery.
Recognizing how productivity loss affects costs for machinery operation over time.
Examining the growing costs associated with older equipment versus their operational efficiency.
For every hour, loss on the flow, 3% of the cost we know!
Imagine an old car that costs more in repairs than the value of driving it. This is like obsolescence in machinery, showing that keeping old machines can incur more costs up the road.
DOWNTIME: D - Downtime cost, O - Operational hours, W - Wasted resources, N - New calculations, T - Total annual costs, I - Impact on productivity, M - Maintenance concerns, E - Economic life.
PROFIT: P - Productivity, R - Repair costs, O - Obsolescence, F - Failure rates, I - Investment in new machines, T - Total cumulative costs.
Term
What is downtime cost?
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Term
Define obsolescence cost.
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The cost incurred when machinery is not operational, expressed as a proportion of equipment cost.
The cost associated with retaining older machinery that is less productive and incurs higher maintenance.
The total operational and associated costs calculated over a period.
The decrease in productivity resulting from downtime, requiring additional resources to restore.
This section explains how to calculate first-year downtime costs associated with equipment and the varying costs in subsequent years while considering factors like productivity loss and obsolescence.
In this section, calculations of downtime costs per hour and annually based on equipment costs are presented. It also discusses the impact of productivity loss on costs and introduces obsolescence costs, establishing a framework for analyzing economic life and replacement timing of equipment.
This section emphasizes the importance of calculating downtime costs for equipment, specifically focusing on the first year. The downtime cost per hour is initially established at 3% of the equipment cost, calculated at 27 rupees based on an equipment cost of 900 rupees per hour. The total yearly downtime cost for the first year is found to be 54,000 rupees, which sets the foundation for further calculations.
As the analysis progresses into a second year with an increased downtime percentage (6%), the downtime cost per hour rises to 54 rupees, totaling 1,08,000 rupees for the year. A cumulative downtime cost is then calculated by summing the annual costs over multiple years, illustrating how downtime costs escalate over time.
Additionally, the impact of productivity loss, as machines require increased operating hours or resources to regain productivity post-downtime, is discussed, leading to the concept of productivity-adjusted cumulative downtime costs. Obsolescence costs due to aging machines and competition are also introduced, showcasing how these costs accumulate and affect decision-making regarding machine replacement. The ultimate focus is on determining the economic life of the machine by calculating a point where total costs are minimized, prompting discussions on when to replace equipment based on cumulative costs.