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Volt Co generate and sells electricity and it operates two types of power station wind and nuclear .
Wind station :
A wind station can generate 1,750 gigawatts of electricity per year. It has a lifecycle cost of $55,000 per gigawatts and an average operating cost of $40,000 per gigawatts over its 20- years life.If volt Co set a price to earn operating margin of 40% over the life a wind station , what will be the total profit per station (to the nearest $m)?
Solution :
Sp = $40,000/60 = $ 66667
Life profit per gigawatts = $11,667( $66667- $55,000 )
Total lifetime profit = $408m ( 1,750* 20yrs * $11,667.My question is in the calculating the selling price. Why do they use only the operating cost as a separate item in determine the selling price before deducting the lifecycle cost ? I taught we could use both costs per year ( lifecycle cost & operating costs ) in setting the selling price ? Or would have been wrong?
Thanks in advance for your response!
The lifecycle cost is the total of all the costs (including the annual operating costs).
The operating margin is the operating profit as a % of the sales, and the operating margin in the revenue less the operating costs.
So…the revenue is 40,000/60% = $66,667.For the lifetime profit we subtract the lifetime costs from the total revenue.
Thank you very much sir . In order words we should always use the operating costs out from the total lifecycle costs to set the selling price. This was exactly section B June 2019 PM exams CBE !
Not always – you can be asked to determine the selling price in many different ways, depending on what is in the question.
If you are given a mark-up or a profit margin, then it is calculated using the operating costs.
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