Total Ownership Cost
A product or service offers it maximum benefits if its dependability has a long-term effect on the ownership.
This paper will discuss the Total Ownership Cost (TOC) of a product by scrutinizing its forthcoming and unforeseen benefits, both in the short term and long term basis. The discussion will further analyze the pros and cons of TOC in relation to a specific product, so as to explore the practicality and authenticity of the model. The main purpose of this essay is to present a basis for the TOC data model, measures, and diagnostic criteria. This basis will grant the basis for the improvement of monetary and mechanized systems decisions that will ultimately update business decisions. Consequently, it will boost the maintenance of operational undertakings and expend limited resources. Total ownership cost (TOC) is the summation of all costs related with any asset’s research, development, acquisition, employees, training, procedure, logistical support and clearance.
It is a financial approximate whose function is to aid customers and business managers establish the direct and indirect costs of a merchandise or system. It is an administration accounting model that can be employed during full cost accounting, or even environmental economics where it comprises of social costs. This cost covers the overall supporting infrastructure that plans and manages an asset’s course over its full life. TOC comes into play when purchasing a product. Managers have the task of estimating the TOC of a product by not just considering the price, but also the full life cycle cost from purchase to disposal.
This helps in making extremely clued-up financial choices. Other costs anticipated being incurred have been added to the original purchase price through the products life cycle, such as maintenance and insurance. TOC is comparable to cost benefit analysis. As the CPO is a car spare-parts-producing company thatalso manufactures engines; my focus will be on medium-mileage car engines that have been in service for over 50 years. With a convoy of over 3000 cars purchasing their products and seeking their services, the estimated profit from the business is enormous. With proper maintenance, the engines can last longer than expected.
Presently, the maintenance crew performs the Operational level (O-level) as well as the Transitional level (T-level) maintenance, while the firm performs the main repairs. Conversely, the maintenance costs of the engines have been ever-increasing by almost 1% annually for the past decade. The consistency engineers and the maintenance workers expect this inclination to persist through the existence of the engines. To curb this costly trend, the company has decided to come up with two options. Option 1 suggested on manufacturing more new engines and extending warranties by twice the duration before expiry.
Conversely, the other (option 2) suggests the performance of all levels of internal maintenance, with no warranties for the T-level maintenance during the existence of the engine.Yearly maintenance costs for both levels for each engine are $400 and $800, correspondingly. The maintenance of a new engine ought to cost half as much at both levels. Contractor overhaul costs are $400 thousand each and are performed twice in a decade depending on the quality and initial price of the engine. The overhaul costs are $800 per engine annually.
The company has been giving an annual $300 per engine per year warranty to customers. The new engine may be acquired at a two-month contract of $2000 each, in loads of 20 engines monthly with a warranty of $200 monthly. The nonrecurring manufacturing costs to assess, plan, and analyze the fixture of new engines into the company’s cars has been approximated at $20 thousand. Averagely, overhauls should be performed on 20% of the engines annually. The annual cost of fuel is averagely $2 thousand for a car using the old eengine.
The new engine would save approximately 10% of fuel compared to the current one, hence making it more efficient. Just like its analysis and popularization by the Gartner Group in 1987, several diverse methodologies and software devices have been invented to analyze TOC. TOC attempts to enumerate the financial effect of setting up an information technology invention across its life cycle. These tools incorporate hardware, software and training. When used in assessing the procurement of a computer system, it frequently incorporates purchase, upkeep, maintenance, improvements, service and sustainability, networking, safety, guidance, and software authorization.
Relative TOC studies will assist the company’s clientele to choose the best alternative for a car engine to fit the needs and financial plan. In judging against the options, the cost elements considered not only the investment costs and operations and maintenance costs, but also the warranty and infrastructure support costs. The main aspects integrated in the TOC for the car engines include reduced depreciation costs, reduced fuel costs and insurance premiums, financing, repairs, fees and taxes, maintenance costs, opportunity costs and downtime costs.Overwhelmingly, for both option 1 and option 2, the cost savings in the long run are sufficient to compensate the initial investments to purchase and retrofit new engines for the cars. However, option 1 has an edge over option 2 since it has a full, attractive warranty after the purchase of a new engine than retrofitting them.
Conversely, this might be detrimental to the overall profits of the company, since the slower the customers adjust to the required model, the likely the company might lose its clientele and staff. Conclusively, while smart managers decide on financial assessments between two alternatives or amid numerous choices, they should utilize the Total Ownership Cost (TOC), not only the cost of purchase.