Assignment 5

XYZ Pvt. Ltd. wants to establish a ball pen manufacturing factory. They identified that five fully
automated ball pen manufacturing machines are required to meet the estimated annual demand of the
market. Each machine requires three workers (one operator and two helper) for its operation; the
operator requires going through a training to handle the machine. Each machine runs for 8 hours in a
day, and thus consumes 80 units of electricity per day. There are 300 working days in a year. The
machine requires only plastic granules as raw material to manufacture the pens. The refills of the pens
are bought from some outside vendor and used directly. Each machine is capable of producing one crore
pens per year. The total requirement of plastic granules per year per machine is 200 metric ton. The
various costs are as follows:

Item Cost (INR)

Machine 5 lakhs
Installation (per machine) 2 lakhs
Transportation (each machine) 10,000
Training cost (per worker) 1000
Pollution cost (per machine per year) 500
Electricity rate (per unit) 10
plastic granules (per metric ton) 1000
Refills (per 10,000) 500
Selling price of pen (per 10,000) 5000
Operator salary (per person) 8000
Helper salary (per person) 5000

1) What is the cost of equipment (C1) for each equipment in the ball pen manufacturing factory?

a) 2,00,000
b) 4,00,000
c) 5,00,000
d) 10,00,000

2) What is the total setup cost (C2) for each equipment in the ball pen manufacturing factory?

a) 1,00,000
b) 52,000
c) 1,25,000
d) 211000

3) Assuming zero downtime, what is the total annual operating cost (C3) for each equipment in the ball
pen manufacturing factory?

a) 9,58,500
 b) 14,70,000
c) 5,80,000
d) 6,70,000

4) What is the cost of ownership for the XYZ Pvt. Ltd.? (Assume, rate of interest (i) =5%, Time span
(z) = 5 years, and N=total number of equipment = 5)

a) 2.35
b) 0.47
c) 1.46
d) 3.15
 Solution: Assignment 5
Equipment cost (C1) = 5,00,000

Set up cost (C2):

Installation cost (I) = 2 lakhs

Transportation cost (T) = 10,000

Training requirement (P)= 1

Training cost (F) =1000

C2=I+T+P*F= 2,00,000+10,000+1*1000=211000

Annual Operating Cost (C3) (Assuming zero downtime)

Total footprint cost (pollution cost) (S*Rs) = 500

Total Electricity Consumption in a year (U) = 80*300= 24000

Electricity rate (Re) = 10

Plastic granules cost per year (O1)= 200*1000=200000

Refills (O2) = (10000000/10000)*500= 500000

Operator’s salary (O3) = 8000

Helpers’ salary (O4) = 5000*2 = 10000

Downtime cost (H*Rm)=0

Total Annual Cost= S*Rs + U*Re + (O1 + O2 + O3 + O4) + H*Rm

= 500 + 24,000*10 + 2,00,0000 + 5,00,0000 + 8000+10,000 + 0

= 9,58,500

Cost of Ownership (CoO)

Output (B) = 1,00,00,000

Economic value of unit output (selling price per piece) (Ve) = 0.5

Rate of interest (i) =5%

Total number of equipment (N) = 5

Time (z) =5 years

C3 9,58,500
C1 +C2 + 5,00,000  2,11,000 
(i+1) z
(1  0.05)5
CoO= ×N =  5 =1.462
B×VE 50,00,000