The firm is contemplating a plant modernization to upgrade existing equipment, which should increase the plant’s output while lowering energy costs. Using the current equipment, around 1,500 pounds of salmon can be processed each hour, while the new plant would be able to process 2000, pounds per hour. The updated equipment is made by the same manufacturer as the existing equipment, and the production personnel feel that they will be able to learn to use the new equipment quickly. For this reason, costs to train personnel are assumed to be negligible. The production manager, Bjorn Pedersen, is skeptical about undergoing the plant modernization, The older equipment, he argues, is already paid for, and new equipment would cost $10,000 per week, This cost is comprised of both principal and interest, and includes manufacturer installation of the equipment The controller, Maret Karlsen, cautions that all decisions related to costs should be included in the analysis and that because the energy consumption would be different, this must also be accounted for in the decision. Energy costs are presently $10 per unit, and the existing plant uses 1,000 units of energy per week. With the modernized plant, the consumption of energy would fall by 50%.

Discussion Questions

1. What is the productivity of the processing facility, with the equipment currently in use?

2. What would the productivity of the plant become if the new system were purchased and implemented?

3. What would be the amount of additional expense on equipment that would make productivity of the two systems equal?

4. What might happen if energy costs increase in the future?