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!
Ask the Tutor ACCA PM
Lifecycle costs
6y ago#1The 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 !
6y ago#3Not 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.
Thank you sir !
6y ago#5You are welcome :-)
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