Cost Analysis and Estimating for Engineering and Management

1. Cost Analysis and Estimatingfor Engineering and Management Chapter 9 Cost Analysis

2. Overview • Making Decisions (Tradeoffs) • Cash Flow Effects • Variations on Breakeven Analysis • Marginal Costs, Revenues, Profits • Life Cycle Costs

3. Tradeoffs • Between/Among Design Alternatives • Proceed or Terminate • Make or Buy • Current or Proposed Product/Method • Often Before or During Design

4. Product Development

5. Tradeoff Study • Search for Alternatives • Determine Cost Estimates • Use Comparative Economy • Consider Constraints • Understand Irreducible Factors • Make Decisions

6. Considering Cash Flow • Amount and Timing of Cash • Coming In, From Sales • Going Out, In Expenses • Also • Depreciation • Taxes • Inflation/Deflation

7. Taxation Effects on Cash Flow • Property Taxes • Fixed, Comparatively Small • Sales Taxes • Part of Material/Equipment Cost • Income Taxes • Federal and Sometimes State

8. Income Taxes • Proportion of Gross Income • Net Income: • What’s Left After Taxes Paid Eq 9.1

9. If Income is Between  and The tax is of the Amount Over $ 0 $50,000 15% 0 50,000 75,000 $ 7,500 + 25% 50,000 75,000 100,000 13,750 + 34% 75,000 100,000 335,000 22,500 + 39% 100,000 335,000 10,000,000 113,900 + 34% 335,000 10,000,000 15,000,000 3,400,000 + 35% 10,000,000 15,000,000 18,333,333 5,150,000 + 38% 15,000,000 18,333,333 …. 6,416,667 + 35% 0 Graduated Tax Schedule

10. Inflation/Deflation • “Value” of Dollar Changes • Purchasing Power • Quantized Through Indices • For Comparisons Over Long Times Eq 9.3

11. Calculating Cash Flow • Usually for Annual Basis • Only for Top/High Level • Mathematically: Eq 9.4

12. Breakeven • How Many Must Be Sold to Recover Costs • Relationship • Cost • Price • Volume • Profit

13. Linear Cost Case • Fixed Cost Is Constant for Period • Does Not Change with Quantity • Variable Cost Is Linear • Constant per Unit Cost • No Production, No Variable Cost

14. Calculations • Total Cost • Cost per Unit • Total Revenue Eq 9.6 Eq 9.7 Eq 9.8

15. Breakeven Point • For Linear Variable Cost • Higher Quantities Reduce Fixed Cost per Unit Eq 9.9

16. Breakeven Chart

17. Per Unit Chart

18. Linear Comparisons • Breakeven Process Can Be Used to Compare Alternatives • Between Two Processes (Isocost Point) • Make-or-Buy • Reducing Material Costs • Tax Effects

19. Process Comparison

20. Make or Buy

21. Material Cost Reduction

22. Tax Effects

23. Semi-Fixed Costs • Cost Changes In Steps • Changes Infrequent During Scope • Examples • Add Another Shift • Add Another Machine/Line • Total Cost Eq 9.10

24. Semi-Fixed Cost Chart

25. Semi-Fixed per Unit Chart

26. Nonlinear Cost • Per Unit Variable Cost Is Not Constant • Per Unit Revenue May Also Vary • Add Nonlinear Variable and Fixed Costs • Divide By Number of Units to Get Average Unit Cost

27. Units Cf nCv CT CT/n 0 $4,000 $4,000 1 4,000 $800 4,800 $4,800 2 4,000 1,120 5,120 2,560 3 4,000 1,340 5,340 1,780 4 4,000 1,600 5,600 1,400 5 4,000 1,900 5,900 1,180 6 4,000 2,520 6,520 1,087 7 4,000 3,520 7,520 1,074 8 4,000 4,800 8,800 1,100 Cost Schedule

28. Marginal Cost, Revenue, Profit • Associated with an Additional Unit of Production • Can Be Nonlinear • Marginal Cost = CT / n • Marginal Revenue = RT / n • Marginal Profit = RT / n - CT / n

29. n Marginal Cost Marginal Revenue Marginal Profit 0 1 $800 $2,000 $1,200 2 320 2,000 1,680 3 220 2,000 1,780 4 260 1,800 1,540 5 300 1,500 1,200 6 620 1,200 580 7 1,000 1,100 100 8 1,280 1,100 (180) Product Analysis

30. Total Revenue and Cost

31. Marginal Plots

32. Revised Breakeven Analysis • Find Linear Approximation for Revenue Data • Regression Analysis • Breakeven Eq 9.11 Eq 9.13

33. Linear Breakeven

34. Higher Order Solutions • To Fit Some Data Higher Order Polynomial Regression Is Needed • Marginal Cost/Revenue Determined Using Derivation of Regressed Models Eq 9.14 Eq 9.15

35. Nonlinear Cost & Revenue

36. Marginal Plots

37. Consequences • Minimum & Maximum Production Limits • Marginal Profit = Zero • Optimum • Sales Revenue, Production Cost, Profit • But Not All at the Same Point Eq 9.17

38. Life Cycle Cost • Considers Costs for Entire Life • Production / Acquisition • Operation • Maintenance / Upkeep • Salvage Value / Disposal • Recycling • Sum of All Costs from Concept Forward

39. LCC Use • Used for Comparing Alternatives • Initial Cost and Operating /Use Cost • For Example • High Cost, Reliable Item • Low Cost, More Repair / Replacement • Pay Now or Pay Later

40. Estimates Required for LCC • Design • Capital Investment • Operation, Maintenance, Use • Replacement • Upgrading • Salvage

41. Phases of Project Life

42. End of Life • Worn Out • Ceases Function • Loss of Profit • Costs Too Much to Continue Operation • Obsolete • Purpose No Longer Exists • Superior Replacement Available

43. Operating & Maintenance Costs • Need • Operating Profile • Maintenance Schedule • Repair Data • Scheduled Maintenance (Preventative) Eq 9.18

44. Breakdown Costs • Mean Time Between Failure (MTBF) • Mean Time to Repair (MTTR) Eq 9.19

45. LCC Comparison

46. Long Life Costs • Life in Multiple Years • Interest Rate Considerations • Time Value of Money • $1 in 5 Years Is Worth Less Today • Impacts LCC Calculations • Covered In Chapter 10

47. Summary • Methods for Making Tradeoff Decisions • Considerations Involving Cash Flow • More Complicated Breakeven Models • Marginal Costs, etc. • Limits on Production • Costs for Entire Life Cycle