The engraving department uses an aging rotary engraver to engrave plaques and trophies The machine has been reliable, but does require regular maintenance and periodic replacement of parts Charlie has just found out that this engraver will no longer be supported by the manufacturer This means that service and parts will be hard to get in the future and if it breaks it could take up to three weeks to get a new one up and running They keep this machine running almost 8 hours a day, every day Every day that the engraver is down will cost around $975 in lost income If he has to buy a new engraver, it would cost around $25,000 He can get a one year loan at 12 to buy a new engraver, but he worries that this is a lot of money to spend, especially since the old engraver is still working fine He has to make a decision What will be the total cost of the engraver How much revenue will be lost if the engraver is down for 18 business days If Charlie makes a 25 net profit margin on the engraving revenue, how many days will it take to pay for the engraver if all of the net profit is applied to the purchase cost How much profit is generated per day Should Charlie purchase a new engraver now or wait until the old engraver breaks before ordering a new engraver Answer Total cost of purchase 25000 (1 0 12) 28000 Lost sales for 18 days 975 x 18 17550 Profit generated per day 0 25 975 243 75 Days it will take to pay for the engraver 28000 243 75 114 87 115 If the engraver breaks down, the new one will be taken after three weeks and the lost sales will be 21 x 975 20745 if facility works each day Lost profit 20745 x 0 25 5118 75 Interest saved on the new equipment will be the only incentive of not buying the equipment right now which is 0 12 25000 3000 for entire year The decision of not purchasing will be worthwhile only if the equipment does not break for around next 2 years when the profit lost and interest saved are equal The decision should be taken after calculating the probability of breaking down of equipment for next 2 years What information would you need in order to calculate the probability of equipment breaking down in the next 2 years

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The engraving department uses an aging rotary engraver to engrave plaques and trophies. The machine has been reliable, but does require regular maintenance and periodic

The engraving department uses an aging rotary engraver to engrave plaques and trophies. The machine has been reliable, but does require regular maintenance and periodic replacement of parts. Charlie has just found out that this engraver will no longer be supported by the manufacturer. This means that service and parts will be hard to get in the future and if it breaks it could take up to three weeks to get a new one up and running. They keep this machine running almost 8 hours a day, every day. Every day that the engraver is down will cost around $975 in lost income.

If he has to buy a new engraver, it would cost around $25,000. He can get a one-year loan at 12% to buy a new engraver, but he worries that this is a lot of money to spend, especially since the old engraver is still working fine. He has to make a decision.

What will be the total cost of the engraver?
How much revenue will be lost if the engraver is down for 18 business days?
If Charlie makes a 25% net profit margin on the engraving revenue, how many days will it take to pay for the engraver if all of the net profit is applied to the purchase cost?
How much profit is generated per day?
Should Charlie purchase a new engraver now or wait until the old engraver breaks before ordering a new engraver?

Answer

Total cost of purchase = 25000*(1+0.12) = 28000

Lost sales for 18 days =975 x 18 =17550

Profit generated per day = 0.25*975 =243.75

Days it will take to pay for the engraver = 28000/243.75 =114.87 =115

If the engraver breaks down, the new one will be taken after three weeks and the lost sales will be 21 x 975 =20745 if facility works each day. Lost profit = 20745 x 0.25 =5118.75

Interest saved on the new equipment will be the only incentive of not buying the equipment right now which is 0.12*25000=3000 for entire year. The decision of not purchasing will be worthwhile only if the equipment does not break for around next 2 years when the profit lost and interest saved are equal.

The decision should be taken after calculating the probability of breaking down of equipment for next 2 years.

What information would you need in order to calculate the probability of equipment breaking down in the next 2 years?