Introduction

Established in 1975 through merging of three firms, Century Chemical produces chlorine and caustic soda through a chemical process. It has it largest plant located in St. Gabriel, Louisiana.

Problem Description

Deterioration of the plant capacity because of failing of the component parts therefore, should the firm continue to incur downtime and the loss of sales. To avoid the management must consider installation of a new spare compressor.

Objective

• Profits by adding a new spare compressor
• The total cost of installation
• Compare the total cost and profits of adding a new compressor

Problem statement

Should Century chemical install the new compressor?

Actions possibilities

• Install the spare compressor
• Do nothing

Calculation

What is the additional revenue?

Activity 1 Compressor 1

The downtime for compressor 1

P (Downtime) =0.08

Assuming compressor 1 is fully operation and works for the whole year that (works 24/7 for 365 days) the downtime in terms of days will be equal to 29.2 days. That is (0.08 *365 days).

In addition, lost sales computed from the associated downtime and is given by

Caustic Soda

1700 * $40/ton * 29.2 days = $ 1 985 600

Chlorine

1500 * $50/ton * 29.2 days = $ 2 190 000

Total

$ 2 190 000 + $ 1 985 600 = $ 4 175 600

The downtime for compressor 1

P (Less downtime) =0.92

Assuming compressor 1 is fully operation and works for the whole year that (works 24/7 for 365 days) the amount of work down by the compressor is given by 335.8 days (365 * 0.92).

In addition sales computed from the associated amount of work down and is given by

Caustic Soda

1700 * $40/ton * 335.8 days = $ 22 834 400

Chlorine

1500 * $50/ton * 335.8 days = $ 25 185 000

Total

$ 25 185 000 + $ 22 834 400 = $ 48 019 400

Activity 2 (Compressor 1 and Compressor 2)

P (both Compressors down) = P (Compressor 1 down) * P (Compressor 2 down) = (0.08) * (0.08)

= 0.0064

The 0.64% downtime is equal to 2.336 days (365 * 0.0064).

The lost Sales

Caustic Soda

1700 * $40/ton * 2.336 days = $ 158 848

Chlorine

1500 * $50/ton * 2.336 days = $ 175 200

Total

$ 175 200 + $ 158 848 = $ 334 048

P (both Compressors work) = 1 – P (both Compressors down) = 1 – 0.0064 = 0.9936

The 99.36% reliability is equal to 362.664 days (365 * 0.9936).

Sales

Caustic Soda:

1700 * $40/ton * 362.664 days = $ 24 661 152

Chlorine:

1500 * $50/ton * 362.664 days = $ 27 199 800

Total:

$ 27 199 800 + $ 24 661 152 = $ 51 860 952

| LOST SALES     | Sales |

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 |

Thus, if Compressor 2 is installed, the additional sales of $ 3 841 552 ($ 51 860 952 – 28 019 400)

Total Cost of Installation

Total Cost of Installation = $ 800,000 (Cost of Installation) + $ 71 500 (12 hour of downtime) + $ 160 000 (Cost of capital/Opportunity Cost) + $ 320 000 (Tax in Installation) = $ 1 351 500

1 day of downtime = 365 days/100% = 0.2740% or 0.002740, so:

12 hours of downtime/0.5 days = 0.002740/2 = 0.001370 or 0.1370% downtime

Caustic Soda

1700 * $40/ton * 0.5 day = $ 34 000

Chlorine:

1500 * $50/ton * 0.5 day = $ 37 500

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

Comparing additional profit and cots of installation

The additional revenue is $ 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

Century Company should install the spare compressor since it exceeds the cost of installation. Additionally, it will cover the cost of installation and have an additional revenue of $ 2 490 052.