2.4. Cumulative Cost Per Hour Calculation for Obsolescence

So, downtime cost per hour equal to 3% of your equipment cost. Equipment cost is nothing but 900 rupees per hour.

Downtime cost per hour = (3/100) × (900) = 27 rupees per hour

Your machine is going to operate in a year for 2000 hours. So, what is your yearly downtime cost? Yearly downtime costs for the first year is,

Downtime cost per year = 27 × 2000 = 54,000 rupees

The downtime cost is calculated as a percentage of the equipment cost. In this case, 3% of the equipment cost of 900 rupees per hour results in a downtime cost of 27 rupees per hour. If the machine operates for 2000 hours in a year, the total downtime cost for that year is calculated by multiplying the downtime cost per hour (27 rupees) by the total hours (2000 hours), which gives 54,000 rupees for the first year.

Imagine you own a vending machine that costs you 900 rupees to maintain daily. If it breaks down for repairs, costing you 3% of that maintenance cost, you lose 27 rupees every hour it's out of service. If the machine is unavailable for a total of 2000 hours in a year, your total loss is like losing a monthly subscription fee for being unable to use the machine.

Similarly, calculate the downtime costs, let us calculate for the second year, in the second year the downtime percentage is 6%. So, downtime cost is 6% of your equipment cost,

Downtime cost per hour = (6/100) × (900) = 54 rupees per hour.

Downtime cost per year = 54 × 2000 = 1,08,000 rupees.

In the second year, the downtime percentage increases to 6%. Therefore, the downtime cost per hour becomes 54 rupees (which is 6% of 900). The annual downtime cost is then calculated again by multiplying this new hourly cost by the number of operational hours (2000), resulting in a total downtime cost of 1,08,000 rupees for that year.

Think of a delivery service that uses the same van. In the second year, due to more breakdowns and maintenance needs, the service incurs higher costs (6% of the van's cost). If the van is unavailable for another 2000 hours due to these issues, the company would be losing significantly more money just like a business losing revenue when their delivery service is unavailable.

Now, you find the cumulative downtime cost. Everything is done on cumulative basis. So, find the cumulative downtime cost by adding it.

54,000 + 1,08,000 gives you 1,62,000 for cumulative downtime cost.

To find the cumulative downtime cost, you sum the downtime costs from all previous years. Starting with the first-year cost of 54,000 rupees, you add the second-year cost of 1,08,000 rupees, resulting in a cumulative downtime cost of 1,62,000 rupees up to that point.

Imagine that over two years, you misplace a significant amount of money due to a flawed accounting software. The first year your loss is 54,000 rupees and in the second year's accounting, you lost an additional 1,08,000 rupees. Your total losses accumulate to 1,62,000 rupees which reflects how repeated losses add up over time.

Cumulative cost, end of the first year = 54,000 / 2000 = 27 rupees per hour.

Similarly, for second year, it is

Cumulative cost, end of the second year = 1,08,000 / 4000 = 40.5 rupees per hour.

The cumulative cost per hour at the end of each year is calculated by dividing the total cumulative cost by the total operational hours. After the first year, the cumulative cost is 54,000 rupees, and dividing this by the operational hours (2000) gives a cost of 27 rupees per hour. By the end of the second year, the costs are compounded, and with a total cumulative cost of 1,62,000 rupees over 4000 total hours, the cost per hour rises to 40.5 rupees.

If every month you track how much you spent and how much you used an appliance, by the end of the year, you can see that the per-use cost has increased as the total costs have added up, reflecting on a bill that shows how much you actually spend on each use of the appliance over time.

Now, you have to account for the loss in productivity. ... So, to bring back the productivity to the original production rate, we need to engage the machine for more number of operating hours or we need to increase the number of machines or workers.

Loss in productivity refers to additional costs incurred because the machine is down for repairs. To restore productivity levels, you may need to either increase the total operating hours or even add more machines or personnel to compensate for the productivity loss. This additional cost is then factored into the total costs, resulting in a new category called 'productivity adjusted cumulative downtime costs.'

Picture a restaurant that loses business because of equipment failure. In response, they increase staff hours or bring in additional staff to make up for lost productivity during busy hours. This requires extra funds and also reflects an increase in overall operating costs, reminding us that every time equipment fails, the impacts extend beyond just immediate repairs.

So, here we are trying to calculate the cost increased resulting from retaining the old machine with us, ... what is the increasing cost we are facing that is what is the obsolescence cost.

Obsolescence costs refer to the expenses incurred by not upgrading to newer models of machinery or technology that offer better productivity or lower costs. As machines age, they may become less efficient and require more maintenance, which increases overall operational costs. Understanding these costs is crucial for deciding whether to maintain older equipment or invest in new, more efficient machinery.

Consider a smartphone that gradually becomes outdated. Holding onto an older model is akin to paying more for repairs as it becomes less functional compared to newer models that not only operate faster but also consume less energy. This concept of outdated technology explains why it may make more sense economically to replace old machines sooner rather than later.

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