Chapter 10 pricing equipment
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Chapter 10 Pricing Equipment Renting Equipment There can be advantages to renting rather than owning construction equipment; including: The builder does not have to keep a large collection of equipment for occasional use.

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Chapter 10 pricing equipment l.jpg

Chapter 10Pricing Equipment


Renting equipment l.jpg
Renting Equipment

  • There can be advantages to renting rather than owning construction equipment; including:

    • The builder does not have to keep a large collection of equipment for occasional use.

    • The builder has continuous access to the newest and most efficient items of equipment.

    • There is little or no need for equipment warehouse and storage facilities.

    • There is no need for the builder to employ equipment maintenance staff.

    • Accounting for equipment costs can be simpler when equipment is rented.

    • There may be significant savings on company insurance premiums when a builder does not own equipment.


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Owning Equipment

  • The cost of owning equipment (per hour) can be considerably less than rental rates when the equipment is going to be heavily used.

  • To determine ownership cost, the following aspects need to be considered:

    • Depreciation expense

    • Maintenance and repair costs

    • Financing expenses

    • Taxes

    • Insurance costs

    • Storage costs

    • Fuel and lubrication costs


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Depreciation

  • Depreciation is the process of allocating the acquisition cost of an asset over its useful life.

  • Terms used:

    • Initial cost: the cost to acquire the item

    • Useful life: number of years for which it is used

    • Salvage value: estimated sales price at the end of its life

  • Using straight-line depreciation:

    • Annual depreciation = initial cost - estimated salvage value (vehicle) estimated useful life (years)

  • The depreciation rate of tires will be different from that on the vehicle so it is calculated separately.


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Maintenance and Repairs

  • Maintenance and repair costs are calculated as a percentage of the annual depreciation costs.

  • The percentage varies between 80% and 130%.

  • When straight-line depreciation is used, depreciation in the early years will be under-estimated, but this will be offset by the maintenance allowance which will be over estimated at this time.


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Equipment Overheads

  • Equipment overheads include:

    • Financing expenses

    • Taxes

    • Insurance

    • Storage costs

  • These expenses are often combined to form a total equipment overhead rate that is calculated as a percentage of average annual investment, where:

    • Average annual investment = total initial cost + salvage value 2


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Fuel and Lubrication Costs

  • Fuel and lubrication oil consumption can be determined by monitoring field operations.

  • If data is not available, fuel consumption information may be obtained from equipment manufacturers.

  • Operating under normal conditions, a gasoline engine will consume approximately 0.06 gallons of fuel for each horsepower-hour developed.

  • A diesel engine is slightly more efficient at 0.04 gallons of fuel for each horsepower-hour.

  • An operating factor is used to account for times when the engine is not operating at full throttle.

  • Lube oil is allowed for at 10% of fuel cost.


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Pricing Equipment – Example 1

  • Calculate the ownership cost per hour for a generator powered by a 20 H.P. gasoline engine based on the following:

    • ENGINE: 20 H.P. gasoline

    • OPERATING FACTOR: 75%

    • PURCHASE PRICE: $20,000

    • FREIGHT CHARGES: $600

    • SALVAGE VALUE: $4,000

    • USEFUL LIFE: 6 YEARS

    • HOURS USED PER YEAR: 1,000

    • MAINTENANCE & REPAIRS: 100% of depreciation

    • EQUIP’T OVERHEAD RATE: 11%

    • FUEL PRICE: $2.80 per gallon


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Example 1 – Answer (1 of 2)

  • Average annual investment = (total cost + salvage value) / 2

    = ($20,000 + $600 + $4,000)/2

    = $12,300

  • Fuel Consumption = 20 x 0.06 x 75% gallons/hour

    = 0.90 gallons/hour

  • The annual cost of depreciation, maintenance and repairs, and equipment overheads can now be calculated:

    • Annual costs:

    • Depreciation = initial cost - estimated salvage value/Estimated life (years)

  • = ($20,600 - $4,000) / 6 = $2,767

  • Maintenance and repairs = 100% of annual depreciation = $2,767

  • Equipment overheads = 11% x average annual invest. = 0.11($12,300) = $1,353

  • Total annual costs: $6,887


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Example 1 – Answer (2 of 2)

  • Hourly costs

  • Vehicle cost = total annual cost

  • hours used per year

  • = $6,887 / 1,000 = $6.89

  • Fuel cost = fuel consumption x cost of fuel

  • = 0.90 gals x $2.80 per gal. = $2.52

  • Lube oil = 10% of fuel cost

  • = 0.1 x $2.52 = $0.25

  • Generator cost per hour: $9.66


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Pricing Equipment – Example 2

  • Calculate the ownership cost per hour for an excavator:

    • ENGINE: 51 H.P. diesel

    • OPERATING FACTOR: 60%

    • PURCHASE PRICE: $30,000

    • FREIGHT CHARGES: $2,000

    • SALVAGE VALUE: $9,000

    • USEFUL LIFE: 7 YEARS

    • HOURS USED PER YEAR: 1,600

    • MAINTENANCE & REPAIRS: 110% of depreciation

    • TIRE COST: $1,000

    • TIRE LIFE: 2,000 hours

    • MAINT. & REPAIRS(TIRES): 15% of depreciation

    • EQUIP’T OVERHEAD RATE: 11%

    • FUEL PRICE: $2.50 per gallon


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Example 2 – Answer (1 of 2)

  • Average annual investment = (total cost + salvage value) / 2

  • = ($30,000 + $2,000 + $9,000)/2

  • = $20,500

  • Fuel consumption = 51 x 0.04 x 60% gallons/hour

  • = 1.22 gallons/hour

  • The annual cost of depreciation, maintenance and repairs, and equipment overheads can now be calculated:

  • Annual costs:

    • Depreciation = initial cost – tire cost - estimated salvage

    • Value estimated life (years) = ($32,000 -$1,000 - $9,000) / 7 = $3,143

  • Maintenance and repairs = 110% of annual depreciation = $3,457

  • Equipment overheads = 11% x average annual invest = 0.11($20,500) = $2,255

  • Total annual costs: $8,855


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Example 2 – Answer (2 of 2)

  • Hourly costs

    • Vehicle cost = total annual cost

      hours used per year

      = $6,887 / 1,000 = $6.89

    • Fuel cost = fuel consumption x cost of fuel

      = 0.90 gals x $2.80 per gal. = $2.52

    • Lube oil = 10% of fuel cost

      = 0.1 x $2.52 = $0.25

    • Generator cost per hour: $9.66


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