Topics: Costs, Cost, Business terms / Pages: 1 (366 words) / Published: May 3rd, 2015
Question 4: Estimate costs and revenues for this new system to perform a payback analysis. Use the variable cost data in Exhibit 3; assume the laser cuts at the rate of 40 inches per minute, that a typical blade of 14 inches sells for $25 (33% discount for volumes near 100 units), and the same computer and software will be used as currently. Material load time for a 10-blade sheet of steel is one minute. Use a 3-inch arbor hole size and assume that a cut tooth doubles the cut distance. How would you address the quantification of the intangible benefits the new system might provide? Is the new system justified on an economic basis? How might this system be more or less justifiable on an economic basis than the first laser system?
The following steps are needed to estimate the payback:
1 Estimate the amount of laser cutting needed using a 14” saw blade as a typical product. The blade would have approximately a 44” circumference. Doubling this amount to account for teeth and adding 9” for the arbor gives approximately 97” of linear cutting distance required to manufacture the blade.
2 Based on the cutting speed of 40”/minute, the cutting would take 2.4 minutes. Adding time to handle the blade, and maintain the workstation, estimate the total time at 3 min/blade.
3 Exhibit 3 estimates the operating cost of a 1200 watt laser at $.10/min, making the laser’s portion of the blade cost $.30/blade; not a particularly significant amount for a $25 blade.
4 Exhibit 3 estimates the cost of the laser to be about $200,000. Assume an additional $100,000 for computers and training bringing the total to $300,000.
5 If the laser can produce a blade every 3 minutes, than it could produce 160 in eight hours at $25 a unit. Based on Exhibit 1, the current profit margin is 12%, so it’s safe to assume that the single shift daily profit would equate to 160 X $25 X 12% or $480.
Given the $300,000 cost of the laser, the single shift payback period would be 625 days or half that amount

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