# 13 32 life cycle costing fall 2017 maximum metal

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Chapter 3 / Exercise 1
Mathematics for Machine Technology
Peterson/Smith
Expert Verified
13-32 Life-cycle costing. Maximum Metal Recycling and Salvage receives the opportunity to salvage scrap metal and other materials from an old industrial site. The current owners of the site will sign over the site to Maximum at no cost. Maximum intends to extract scrap metal at the site for 24 months and then will clean up the site, return the land to useable condition, and sell it to a developer. Projected costs associated with the project follow: Ignore time value of money. Required: 1. Assuming that Maximum expects to salvage 70,000 tons of metal from the site, what is the total project life cycle cost? 2. Suppose Maximum can sell the metal for \$110 per ton and wants to earn a profit (before taxes) of \$30 per ton. At what price must Maximum sell the land at the end of the project to achieve its target profit per ton? 3. Now suppose Maximum can only sell the metal for \$100 per ton and the land at \$110,000 less than what you calculated in requirement 2. If Maximum wanted to maintain the same markup percentage on total project life-cycle cost as in requirement 2, by how much would the company have to reduce its total project life-cycle cost? Fall 2017
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Chapter 3 / Exercise 1
Mathematics for Machine Technology
Peterson/Smith
Expert Verified
Fall 2017 Metal Extraction; \$48 Rent; \$27 Administration; \$162 Clean up; \$60 Land Restoration; \$23 Cost of Selling Land; \$80 Total Cost (000) \$400 Metal Extraction Rent Administration Clean up Land Restoration Cost of Selling Land
13-32 Life-cycle costing. Fall 2017 1. Months 1-12 13-24 24-27 Total Variable Costs Extraction period Cleanup & Sale Metal Extraction & Processing 70,000 tons @ \$80/ton \$5,600,000 Fixed Costs Metal Extraction and Processing \$24,000 \$24,000 \$48,000 Building Rent \$12,000 \$12,000 \$3,000 \$27,000 Administration \$72,000 \$72,000 \$18,000 \$162,000 Cleanup \$60,000 \$60,000 Land Restoration \$23,000 \$23,000 Cost of Land Sale \$80,000 \$80,000 Total Lifecycle Costs \$108,000 \$108,000 \$184,000 \$6,000,000 Markup % = 35% \$2,100,000 Profit Target @ \$30/ton \$6,000,000 Total Lifecycle Costs 2. Revenue @\$110/ton \$7,700,000 Total Lifecycle Costs \$6,000,000 Profit before land sale \$1,700,000 Profit Target @ \$30/ton \$2,100,000 Land Sale: Required Price \$400,000
13-32 Life-cycle costing. Fall 2017 3. Revenue @\$100/ton \$7,000,000 Land Sale \$290,000 Total revenue \$7,290,000 ÷ 1.35 Total Life Cycle Costs Target @ 35% Markup \$5,400,000 Total Life Cycle Costs Currently \$6,000,000 Cost Reductions required (\$600,000) Check Revenue @\$100/ton \$7,000,000 Land Sale \$290,000 Total Life Cycle Costs (\$5,400,000) Total Life Cycle Operating Income \$1,890,000 = 35% Total Life Cycle Costs \$5,400,000