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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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renting 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.
    • 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.
owning equipment
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
depreciation
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.
maintenance and repairs
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.
equipment overheads
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
fuel and lubrication costs
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.
pricing equipment example 1
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
example 1 answer 1 of 2
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
example 1 answer 2 of 2
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
pricing equipment example 2
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
example 2 answer 1 of 2
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
example 2 answer 2 of 2
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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