REPLACE FOR MORE PROFIT... PART 1

A DISTINCTION IS MADE BETWEEN THE PHYSICAL LIFE AND THE ECONOMIC LIFE OF EQUIPMENT OR MACHINES OWNED BY AN INDUSTRIAL FIRM. IF PROFITS ARE PLOTTED AGAINST AGE OF EQUIPMENT AT REPLACEMENT, AN INVERTED U-SHAPED CURVE IS OBTAINED, WITH ONLY THE TOP CENTER SECTION ABOVE THE ZERO PROFIT LINE. THEREFORE THE ECONOMIC LIFE OF A MACHINE IS THE LIFE WHICH MAXIMIZES PROFITS OVER THE LIFE-TIME OF THE ENTERPRISE. THE DECISION OF WHEN TO MAKE THE REPLACEMENT OF THE MACHINE IS MOST POPULARLY INTUITIVE, AND COMMONLY CALLED 'MATURE JUDGMENT'. OTHERS DECIDE ON THE BASIS OF MINIMIZING COSTS, A METHOD WHICH DOES NOT CONSIDER FUTURE COSTS; ONCE THE COSTS HAVE BEEN OBSERVED, THEY ARE NO LONGER RECOVERABLE. ALSO THIS DOES NOT CONSIDER LOSS OF PROFITS DUE TO OBSOLECENSE OF EQUIPMENT. THE COST MINIMIZATION TECHNIQUE IS EXAMINED IN DETAIL TO PROVIDE A BETTER COMPARISON WITH THE PROFIT MAXIMIZATION TECHNIQUE. RULES ARE GIVEN FOR THE DETERMINATION OF AVERAGE ANNUAL CUMULATIVE COSTS (CUMULATION OF ANNUAL MAINTENANCE AND OPERATION COSTS PLUS ANNUAL DEPRECIATION COSTS DIVIDED BY YEARS OF USE) AND FOR AVERAGE ANNUAL CUMULATION PROFITS (CUMULATION OF PROFITS, AS DETERMINED BY THE DIFFERENCE OF ANNUAL REVENUE MINUS ANNUAL COSTS, DIVIDED BY YEARS OF USE.) AN EXAMPLE IS GIVEN USING THE TWO TECHNIQUES FOR TRUCKS OF GIVEN TYPES A AND B THE QUESTION IS WHEN SHOULD TYPE A TRUCKS BE REPLACED AND WITH WHICH TYPE, A OR B? USING THE COST MINIMIZATION TECHNIQUE, IT WAS DETERMINED THAT THE TYPE A TRUCK NOW ONE YEAR OLD WILL COST MORE THE NEXT YEAR AND THE FOLLOWING YEAR THAN TYPE B'S MINIMUM ANNUAL CUMULATIVE COST WHICH IS REACHED AFTER 8 YEARS OF USE. THEREFORE THE TIME TO TRADE WOULD BE NOW. USING THE PROFIT MAXIMIZATION TECHNIQUE, IT WOULD BE BEST TO REPLACE TYPE A TRUCKS WITH TYPE B IN TWO MORE YEARS. IT IS CONCLUDED THAT THE INTIAL COST OF A MACHINE IS NOT THE MOST IMPORTANT FACTOR; IT IS THE TOTAL COST OVER A LIFETIME OF USEFUL SERVICE. FUTURE ARTICLES WILL DEMONSTRATE WHICH METHODS ARE MOST EFFECTIVE FOR VARIOUS OPERATIONS.

• Supplemental Notes:
  • Vol 52, No 3, PP 114-122, 1 FIG, 4 TAB
• Authors:
  • DOUGLAS, J
• Publication Date: 1970-3

Media Info

• Serial:
  • Construction Methods and Equipment
  • Publisher: McGraw-Hill, Incorporated

Subject/Index Terms

• TRT Terms: Costs; Decision making; Equipment; Equipment maintenance; Equipment replacement; Life span; Machines; Methodology; Minimization; Optimization; Profits
• Old TRIS Terms: Equipment cost
• Subject Areas: Finance; Highways; Maintenance and Preservation; Society; Vehicles and Equipment;

Filing Info

• Accession Number: 00219382
• Record Type: Publication
• Files: TRIS
• Created Date: May 19 1970 12:00AM