1. Q. A company has direct production costs equal to 50
percent of total annual sales and fixed charges,
overhead, and general expenses equal to $200,000.
If management proposes to increase present annual
sales of $800,000 by 30 percent with a 20 percent
increase in fixed charges, overhead, and general
expenses, what annual sales dollar is required to
provide the same gross earnings as the present plant
operation? What would be the net profit if the
expanded plant were operated at full capacity with
an income tax on gross earnings fixed at 35 percent?
what would be the net profit for the enlarged plant
if total annual sales remained the same as at
present? What would be the net profit for the
enlarged plant if the total annual sales actually
decreased to $700,000?
2. • Present scenario
TPC = DPC + FC + PO + GE
= 0.5(total annual sales) + $200,000
= 0.5($800,000) + $200,000 = $600,000
Gross earnings at present = $(800000-600000)= $200000
• New scenario
TPC = (0.5)(1.3)($800000) + (1.2)($200000)= $760000
Gross earnings for new scenario =
{(1.3)(800000)-(760000)} = $280,000
• Sales required to produce same gross earnings ($200000)
=X
200000 = X - 760000
X= $960,000
3. • Net profit for full capacity = ($280000)(1-0.35) =
$182000
• Net profit if annual sales remain at $800000 =
(800000-760000)(1-0.35) = $26000
4. Turnover Ratio
Turnover ratio =
Reciprocal of turnover ratio is called the capital ratio or the
investment ratio
For chemical industry the turnover ratio is approximated as 0.5
5. Q. The TCI for a chemical plant is $1m,
and the WCI is $100,000. If the plant
can produce an average of 8000 kg
of final product per day, during a 365
day year, what selling price in dollars
per kg of product would be
necessary to give a turn over ratio of
1.0
7. Q. A rough rule of thumb for the chemical industry is
that $1 of annual sales requires $1 of fixed-capital
investment. In a chemical processing plant where
this rule applies, the total capital investment is
$2,500,000 and the working capital is 20 percent of
the total capital investment. The annual total
product cost amounts to $1,500,000. If the national
and regional income-tax rates on gross earnings total
35 percent, determine the following:
(a) Percent of total capital investment returned
annually as gross earnings.
(b) Percent of total capital investment returned
annually as net profit.
9. Types of Capital Cost Estimates
• An estimate of the capital investment for a process may vary from a
predesign estimate based on little information except the size of the
proposed project to a detailed estimate prepared from complete
drawings and specifications
• Between these two extremes of capital-investment estimates, there
can be numerous other estimates which vary in accuracy depending
upon the stage of development of the project
• These estimates are called by a variety of names, but the following
five categories represent the accuracy range and designation normally
used for design purposes
10. 1. Order-of-magnitude estimate (ratio estimate) based on similar
previous cost data; probable accuracy of estimate over ± 30 percent
2. Study estimate (factored estimate) based on knowledge of major
items of equipment; probable accuracy of estimate up to ±30 percent
3. Preliminary estimate (budget authorization estimate; scope
estimate) based on sufficient data to permit the estimate to be
budgeted; probable accuracy of estimate within +20 percent
4. Definitive estimate (project control estimate) based on almost
complete data but before completion of drawings and specifications;
probable accuracy of estimate within ±10 percent
5. Detailed estimate (contractor’s estimate) based on complete
engineering drawings, specifications, and site surveys; probable
accuracy of estimate within +5 percent
11.
12.
13.
14. Break-even point, gross earnings, and net
profit for a process plant
The annual direct production costs for a plant operating at 70 percent
capacity are $280,000 while the sum of the annual fixed charges,
overhead costs, and general expenses is $200,000. What is the break-
even point in units of production per year if total annual sales are
$560,000 and the product sells at $40 per unit? What were the annual
gross earnings and net profit for this plant at 100 percent capacity in
1988 when corporate income taxes required a 15 percent tax on the
first $50,000 of annual gross earnings, 25 percent on annual gross
earnings of $50,000 to $75,000, 34 percent on annual gross earnings
above $75,000, and 5 percent on gross earnings from $100,000 to
$335,000?
