14-33 Life-cycle costing. Life Cycle 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 Life Cycle at no cost. Life Cycle 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: Months 1-24 Metal extraction and processing Fixed $5,500 per month Variable $50 per ton Months 1-27 Rent on temporary buildings $4,500 per month Months 25-27 Administration Clean-up Land restoration $2,000 per month $33,000 per month $223,500 total Cost of selling land $120,000 total Ignore the time value of money. 1. Assuming that Life Cycle expects to salvage 30,000 tons of metal from the site, what is the total project life-cycle cost? 2. Suppose Life Cycle can sell the metal for $80 per ton and wants to earn a profit (before taxes) of $30 per ton. At what price must Life Cycle sell the land at the end of the project to achieve its target profit per ton? 3. Now suppose Life Cycle can only sell the metal for $70 per ton and the land at $141,000 less than what you calculated in requirement 2. If Life Cycle 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?
14-33 Life-cycle costing. Life Cycle 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 Life Cycle at no cost. Life Cycle 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: Months 1-24 Metal extraction and processing Fixed $5,500 per month Variable $50 per ton Months 1-27 Rent on temporary buildings $4,500 per month Months 25-27 Administration Clean-up Land restoration $2,000 per month $33,000 per month $223,500 total Cost of selling land $120,000 total Ignore the time value of money. 1. Assuming that Life Cycle expects to salvage 30,000 tons of metal from the site, what is the total project life-cycle cost? 2. Suppose Life Cycle can sell the metal for $80 per ton and wants to earn a profit (before taxes) of $30 per ton. At what price must Life Cycle sell the land at the end of the project to achieve its target profit per ton? 3. Now suppose Life Cycle can only sell the metal for $70 per ton and the land at $141,000 less than what you calculated in requirement 2. If Life Cycle 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:14-33 Life-cycle costing. Life Cycle 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 Life Cycle at no cost. Life Cycle 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:
Months 1-24
Metal extraction and processing
Fixed
$5,500 per month
Variable
$50 per ton
Months 1-27
Rent on temporary buildings
$4,500 per month
Months 25-27
Administration
Clean-up
Land restoration
$2,000 per month
$33,000 per month
$223,500 total
Cost of selling land
$120,000 total
Ignore the time value of money.
1. Assuming that Life Cycle expects to salvage 30,000 tons of metal from the site, what is the total project
life-cycle cost?
2. Suppose Life Cycle can sell the metal for $80 per ton and wants to earn a profit (before taxes) of $30
per ton. At what price must Life Cycle sell the land at the end of the project to achieve its target profit
per ton?
3. Now suppose Life Cycle can only sell the metal for $70 per ton and the land at $141,000 less than what
you calculated in requirement 2. If Life Cycle 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?
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