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CMA Intermediate · Operations Management and Strategic Management · Economics of Maintenance and Spares Management

A machine costs ₹60,000 with zero resale value. Maintenance costs by year are: ₹6,000, ₹9,000, ₹13,000, ₹18,000, ₹24,000 and ₹31,000 for years 1 to 6. Ignoring the time value of money, the optimal replacement policy is to replace at the end of year:

Replace at the end of year 5. Average annual cost falls to about ₹26,000 by year 5 and rises to about ₹26,833 in year 6, because the year-6 maintenance of ₹31,000 exceeds the running average.

  1. A3
  2. B4Correct
  3. C5
  4. D6

Explanation

Cumulative maintenance: 6,000; 15,000; 28,000; 46,000; 70,000. Total cost: 66,000; 75,000; 88,000; 1,06,000; 1,30,000. Average: 66,000; 37,500; 29,333; 26,500; 26,000. Year 5 average is 26,000 and year 6 cumulative maintenance is 1,01,000, total 1,61,000, average 26,833. Minimum is year 5, so the correct choice is year 5 and the key must be option C. Check: the year-6 maintenance of 31,000 exceeds the year-5 average of 26,000, so replace after year 5.

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