Page 237 - Plant design and economics for chemical engineers

208 PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS

For income-tax calculations, interest on owned money cannot be charged as a
cost. In design calculations, however, interest can be included as a cost unless
there is assurance that the total capital investment will be supplied from the
company’s funds and the company policies permit exclusion of interest as a cost.

GROSS-EARNINGS COSTS
The total income minus the total production cost gives the gross earnings made
by the particular production operation, which can then be treated mathemati-
cally by any of several methods to measure the profitably of the proposed
venture or project. These methods will be discussed later in Chaps. 7 and 10.
Because of income-tax demands, the final netprofit is often much less than
the gross earnings. Income-tax rates are based on the gross earnings received
from all the company interests. Consequently, the magnitude of these costs
varies widely from one company to another.
On an annual basis, the corporate income-tax laws for the United States in
1979 required payment of a 17, 20, 30, and 40 percent normal tax on the lst,
2nd, 3rd, and 4th $25,000, respectively, of the annual gross earnings of a
corporation plus 46 percent of all annual gross earnings above $100,000. In
addition, if other levies, such as state income taxes, were included, the overall
tax rate could have been even higher. By 1988, the corporate income-tax laws
had been changed to 15 percent on the first $50,000 of annual gross earnings, 25
percent on annual gross earnings of $50,000 to $75,000, and 34 percent on
annual gross earnings above $75,000 plus a special graduated-tax phase-out of
5 percent on the gross earnings from $100,000 to $335,000. Tax rates vary from
year to year depending on Federal and state regulations as is shown in the
following example where 1988 Federal-tax rates are considered.

Example 7 Break-even point, gross earnings, and net profit for a process plant.
The annual direct production costs for a plant operating at 70 percent capacity are
$280,000 while the sum of the annual fixed charges, overhead costs, and general
expenses is $200,000. What is the break-even point in units of production per year
if total annual sales are $560,000 and the product sells at $40 per unit? What were
the annual gross earnings and net profit for this plant at 100 percent capacity in
1988 when corporate income taxes required a 15 percent tax on the first $50,000 of
annual gross earnings, 25 percent on annual gross earnings of $50,000 to $75,000,
34 percent on annual gross earnings above $75,000, and 5 percent on gross
earnings from $100,000 to $335,000?

Solution. The break-even point (Fig. 6-3) occurs when the total annual product
cost equals the total annual sales. The total annual product cost is the sum of the
fixed costs (including fIxed charges, overhead, and general expenses) and the direct
production costs for n units per year. The total annual sales is the product of the
number of units and the selling price per unit. Thus
280,000
Direct production cost/unit =
(560,000/40) = $20’unit