Area of concern: should the management of Century Chemical Company use a spare compressor?
Analysis
Additional Revenue
Stage 1: Compressor 1
The final product is 0.08, hence in one year, with a down time of 8% it is 29.2 (365*0.08)
Taking into fact that the 29.2 is the time and the compressor has 1500 tons of chlorine valued at $50/ton and 1700 of caustic soda $40/ton
CHLORINE
1500 * $50/ton * 29.2 days = $ 2 190 000
CAUSTIC SODA
1700 * $40/ton * 29.2 days = $ 1 985 600
TOTAL $ 2 190 000 + $ 1 985 600 = $ 4 175 600
P (Compressor 1 works) = 0.92
While for 92% reliability is same as 335.8 days (365*0.92)
The profit and overhead is valued at, given the reliability is same as 335.8 days and the compressors produces 1500 tons of chlorine valued as before.
CHLORINE
1500 * $50/ton * 335.8 days = $ 25 185 000
CAUSTIC SODA
1700 * $40/ton * 335.8 days = $ 22 834 400
TOTAL $ 25 185 000 + $ 22 834 400 = $ 48 019 400
Stage 2- (Compressor 1 and Compressor 2)
Compressor 1
Raw Materials Final Product
Compressor 2
Even if Compressor 1 has issues:
Compressor 1
Raw Materials Final Product
Compressor 2
Or compressor 2 has issues
Compressor 1
Raw Materials Final Product
Compressor 2
The creation of chlorine and caustic soda progresses
The two compressors fail = (compressor 1 fails) * (compressor 2 fails) = (0.08) * (0.08) = 0.0064
Taking that the two compressors work for year, the 0.64% downtime is same as 2.336 days (365 * 0.0064).
The lost sale is:
CHLORINE
1500 * $50/ton * 2.336 days = $ 175 200
CAUSTIC SODA
1700 * $40/ton * 2.336 days = $ 158 848
TOTAL $ 175 200 + $ 158 848 = $ 334 048
P (compressor 1&2) = 1 – P (the two compressors fail) = 1 – 0.0064 = 0.9936
The days (assuming the two compressors work for 365 days); the 99.36% reliability is equal to 362.664 days (365 * 0.9936).
Profit and overhead with the same aspects as before:
CHLORINE
1500 * $50/ton * 362.664 days = $ 27 199 800
CAUSTIC SODA
1700 * $40/ton * 362.664 days = $ 24 661 152
TOTAL: $ 27 199 800 + $ 24 661 152 = $ 51 860 952
| LOST SALES | PROFIT |
COMPRESSOR 1 Only | $ 4 175 600 | $ 48 019 400 |
COMPRESSOR 1 & 2 | $ 334 048 | $ 51 860 952 |
DIFFERENCE | Decrease of $ $ 3 841 552 | Increase of $ 3 841 552 |
Hence if compressor 2 is installed, the added profit is $ 3841552 ($ 51 860 952 – 28 019 400) and a drop in downtime cost.
Total Cost of Installation
TOTAL COST OF INSTALLATION = $ 800,000 (Installation) + $ 71 500 (12 hour of downtime) + $ 160 000 (capital/Opportunity Cost) + $ 320 000 (Tax) = $ 1 351 500
1 day of downtime = 365 days/100% = 0.2740% or 0.002740, therefore:
12 hours of downtime/0.5 days = 0.002740/2 = 0.001370 or 0.1370% downtime
It is worth:
CHLORINE
1500 * $50/ton * 0.5 day = $ 37 500
CAUSTIC SODA
1700 * $40/ton * 0.5 day = $ 34 000
TOTAL- $ 37 500 + $ 34 000= $ 71 500
Cost of capital/Opportunity Cost = $ 800 000 * 20% = $ 160 000
Tax in Installation = $ 800 000 * 40% = $ 320 000
Comparison of Additional Profit and Cost of Installation
Taking into consideration the ADDITIONAL PROFIT that is bigger than the COST OF INSTALLATION, there is more revenue when the company installs the spare compressor.
The additional revenue is therefore $ 2 490 052.
Additional Revenue = Additional Profit when Compressor 2 is installed – Total Cost of Installation = $ 3 841 552 – $ 1 351 500 = $ 2 490 052
Conclusion
The top hierarchy of the Century Chemical Company ought to install the spare compressor since it has added advantage goes above the cost, the company will face sales which will seal the cost of installation and acquire more revenue of $ 2 490 052.
