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Engineering Economics

Engineering Economics. What is it? It is a subset of economics concerned with the use and application of economic principles in the analysis of engineering decisions. Why us it?

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Engineering Economics

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  1. Engineering Economics • What is it? • It is a subset of economics concerned with the use and application of economic principles in the analysis of engineering decisions. • Why us it? • Engineers seek solutions to problems, and the economic viability of each potential solution is normally considered along with the technical aspects. Essentially, engineering economics involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available.

  2. Fixed Costs • Fixed Costs: Fixed cost are those costs which are independent of the quantity of the product manufactures. • Though the fixed costs are independent of the number of parts produced, they are, however, broken down by piece. • For example, a company pays $2,000 in taxes per month. This amount remains the same despite the number of parts produced. When determining the manufacturing costs of a part, the taxes must be included, as well as, all other costs associated. In this particular example, the cost for tax per part at 20,000 parts a month would be ________ per part. • Taxes • Insurance • Interest on capital invested and inventory • Technical services • Personnel and security general supplies • Share of corporate executive staff • Legal staff • Research and Development (R&D) • Sales force • Delivery and warehouse costs

  3. Variable Costs • Variable Costs: Costs that varies with the quantity of products made. Variable costs increase proportionately as the quantity produced increases. • Essentially, variable costs will vary with the amount of activity. • For example, suppose company ABC produces ceramic mugs for a cost of $2 a mug. If the company produces 500 units, its variable cost will be $1,000. However, if the company does not produce any units, it will not have any variable cost for producing the mugs. • direct labor • material costs • maintenance costs • power and utility • quality control staff • royalty payments • packaging and storage • scrap losses and spoilage

  4. Total Variable Costs and Total Costs The total cost to provide a product or service over some period of time or production volume is the total fixed cost plus the total variable cost, where: Total variable cost = (Variable cost per unit) (Total number of units) Therefore, Total cost = total variable cost + total fixed costs A company produces a single, high-volume product. One year its production volume was 780,000 units, its fixed costs were $3.2 million and its variable costs were $16 per unit. What was the company's total cost for the year?

  5. Total Average Costs The average cost is the total cost of an output or activity divided by the total output or activity in units. If the total direct cost of producing 400,000 is $3.2 million, then the average total direct cost per unit is $8.00. A company produces a single, high-volume product. One year its production volume was 780,000 units, its fixed costs were $3.2 million and its variable costs were $16 per unit. What was the company's average cost per unit produced?

  6. Breakeven Point • The breakeven point is the output level at which total revenue is equal to total cost. It can be calculated as follows: • BEP = FC/(SP - VC) • BEP = breakeven pointFC = fixed costs SP = selling price per unitVC = variable cost per unit A manufacturer produces and sells exactly 600,000 units of a single product annually. The fixed cost of the company is $3.6 million per year, and the variable cost is $47 per unit. In the coming year, the company is selling its product at a price of $56 per unit. Calculate the breakeven point (BEP) in units for the coming year.

  7. Cash Flow Diagrams • Cash flow diagrams visually represent income and expenses over some time interval. • The diagram consists of a horizontal line with markers at a series of time intervals. • At appropriate times, expenses and costs are shown. For example, consider a truck that is going to be purchased for $55,000. It will cost $9,500 each year to operate including fuel and maintenance. It will need to have its engine rebuilt in 6 years for a cost of $22,000 and it will be sold at year 9 for $6,000. Here is the cash flow diagram:

  8. Cash Flow Diagrams You try - Consider a lathe that is going to be purchased for $45,000. It will cost $5,500 each year to operate including parts and maintenance, but will create an annual income of $7,000. It will need to have its motor rebuilt in 7 years for a cost of $19,000 and it will be sold at the end of year 12 for $8,000. What does the cash flow diagram look like:

  9. Cash Flow Diagrams • You Try - Using the cash flow diagram below, answer the questions below: • 1.What is the initial cost of this new machine? • 2.What is the annual operating cost for this machine? • 3.What is the rebuild cost of the machine? • 4.What is the salvage value for the machine? • 5.In what single year is the total combined value of the machine positive? What is the positive value?

  10. Cost Estimating Models: Per-Unit Model Engineering economic analysis involves present and future economic factors; thus, it is critical to obtain reliable estimates of future costs, benefits and other economic parameters. There are several methods to do so, but we will focus on the per-unit model. The per-unit model is a simple but useful model in which a cost estimate is made for a single unit, then the total cost estimate results from multiplying the estimated cost per unit times the number of units. Estimates can be rough estimates, semi detailed estimates, or detailed estimates, depending on the needs for the estimates. The cost to provide workplace safety training to a new employee is estimated at $600 for a particular manufacturer. Use the per-unit cost estimating model to estimate the annual workplace safety training cost if an estimated 30 new employees are hired annually. $18,000

  11. Project • Murphy Manufacturing • Product Desired - Bubble Machines • Committed 60,000 units, with limit on cost per machine: $30.00 • Fixed Costs: Design Engineer (R&D) Manufacturing Engineer (R&D) Classroom Fees (use of room, storage of material, computer usage, etc.) Marketing • Variable Costs: Production Personnel Material

  12. Project Example • Fixed Costs: Design Engineering (R&D) $1.00/piece Manufacturing Engineering (R&D) $1.00/piece Classroom Fees $0.50/ piece (use of room, storage of material, computer usage, etc.) Marketing $0.50 • Variable Costs: • Production Personnel $0.20/person • Material • DC Motor (Murphy Provided) - $2.00 • DC Motor (Self Provided) - $6.00 • Can - $1.98 • Platform and Gear $ (wood = $0.02/sq in) (cardboard = $0.01/sq in) = $2.88 • Rubber Band – 0.02 • Straws – $0.03 * 9 = $0.27 • Tongue Depressors - $0.05 * 3 (1 for blades) = $0.15 • Bottle Cap - $0.05 • Wooden Dowel - $0.12 • Large Wooden Dowel - $3.98 • 9 Volt Battery – $2.49 • Glue Sticks – $0.46 * 2 = $0.92 • Total Cost Per Unit: $24.46 • Annual Cost for Project: 24.46 * 60,000 = $1,467,600 • Annual Income for Project: (60,000 * 30) – 1,467,600 = $332,400

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