MIE 754 - Class #1 Manufacturing & Engineering Economics

MIE 754 - Class #1 Manufacturing & Engineering Economics Professor: Dr. Janis Terpenny Office: 120 E Marston Hall Office Hrs: 10am-12 noon Tues & Thurs E-mail: terpenny@ecs.umass.edu Phone: (413) 545-0707 (office) (413) 256-6052 (home)

Course Description • This course examines the monetary and non-monetary considerations necessary in strategic decision making • Engineering economic principles developed and applied throughout life-cycle phases • design and development, production, construction, utilization, support, phase out and disposal • consideration of risk and uncertainty

Course Description • Textbook: • Canada, John R., Sullivan, William, G., and White, John A. Capital Investment Analysis for Engineering and Management, Second Edition, Prentice Hall, Inc., 1996, (ISBN 0-13-311036-2) • Additional handouts distributed as needed • Prerequisites • None • Undergraduate course in engineering economics would be helpful

Topics Covered • Introduction and Overview • Review of Engineering Economy Basics • The Economics of Engineering Design • Cost Estimating and Management • Replacement Analysis • Dealing with Risk and/or Poor Estimates • Decision Analysis for Complex and Multiple Attributes Problems • Revenue Expansion vs Cost Reduction

Grading • Mid-term Exam1 20% • Final Exam1 20% • Assignments 30% • Graded Assignments 20% • Homework check 10% • Term Project 30% 1 Exams are take home

GROUND RULES • There are no dumb questions • We criticize ideas, not people • Let's all be considerate of one another • It is OK to tell the instructor we're out of time • If you need to leave class, do so quietly • Please don't talk while others are talking • Be patient and kind to one another … especially to the instructor

Course Web Site:http://mielsvr2.ecs.umass.edu/virtual_econ/

Homework #1:Mini Biography … Who are you? • Current Position • Degree Pursuing • Career Objectives • Outside Interests • Why are you taking MIE 754? • Due 1 week from today • Send via e-mail attachment (preferred), or • Submit hardcopy (in-class or through VIP)

Engineering Economy is Problem Solving • Engineering is a profession devoted to problem solving and design of alternative courses of action. • Engineering economy is a subset of engineering devoted to deciding which course of action best meets technical performance criteria while using capital in a prudent manner.

Engineering Economy is Problem Solving • A problem is a perception of a gap between the present and some desired state of affairs. • Three conditions characterize a problem: • Alternative courses of action are available, • The alternative selected has a significant effect on the future, and • The best alternative to select is not apparent.

Problem Examples ? From: • Industry • Government • Personal

Engineering economics is more than evaluating investment problems ... Most engineers end up designing systems, equipment, processes, etc., it is imperative that we ask “will it pay” in the context of design? Why? Approximately 80-85% of a product's life cycle cost is determined during preliminary and detailed design activities. Think about it! Engineers make multi-million dollar decisions every minute … perhaps without realizing it. Let's learn to make these decisions wisely!

Engineering Economics Analysis Procedure • Problem recognition, formulation, and evaluation • Development of feasible alternatives • Development of the net cash flow for each alternative • Selection of a criterion (or criteria) • Analysis and comparison of the alternatives • Selection of the preferred alternative • Performance monitoring and post evaluation of results

Basic Principles of Economic Analysis • Develop the Alternatives • Focus on the Differences • Use a Consistent Viewpoint • Use a Common Unit of Measure • Consider all Relevant Criteria • Make Uncertainty Explicit • Revisit Your Decisions

Recognition of a Problem Opportunity • 1st step of rational decision making • Obvious problem opportunities Examples? • Non-obvious problem opportunities Examples?

Generation of Alternatives • Use Imagination and Creativity • State Problem and Objectives Clearly • Identify Classes of Alternatives • Identify Variations for Each Class

Estimates in Economic Analysis • Alternatives are based on estimates about the future • Poor estimates lead to poor analysis • Sources of data for estimates: accounting records, statistical, economic, engineering data, good judgment

Speaking a Common Language … Cost Terminology Fixed/Variable Costs - If costs change appreciably with fluctuations in business activity, they are “variable.” Otherwise, they are “fixed.” A widely used cost model is: Total Costs = Fixed Costs + Variable Costs Recurring/Nonrecurring Costs - If costs are repetitive and occur when an organization produces goods or services on a continuing basis, they are “recurring.” Otherwise they are “nonrecurring.”

Cost Terminology Direct/Indirect Costs - If costs can be reasonably measured and allocated to a specific output, they are “direct.” Otherwise they are “indirect.” Examples? Overhead Costs - All costs of providing goods or services other than direct labor and direct material. Indirect costs are a subset of overhead costs. Fixed overhead relates more to plant capacity than production volume (variable overhead). Examples?

Cost Terminology • Allocation of overhead to specific outputs may be in proportion to: 1. Direct labor hours 2. Direct material costs 3. Machine hours • Total Cost = Direct Material + Direct Labor + Overhead

Cost Terminology Sunk Costs - Past costs that are unrecoverable and are not relevant for decision making purposes. Suppose the heating, ventilating and air conditioning system in your home has just experienced a major failure. You immediately call the Breath Easy Company for an estimate to replace your system. Their price is $4,200 and you gladly sign a contract and write a check for the required $1,000 down payment. At this point the weather warms and the urgency for replacement of your defunct system eases somewhat. You then get a second estimate for a new HVAC system. It is $3,000. You call Breath Easy back and they inform you that the $1,000 down payment is not refundable! What should you do? Explain.

Cost Terminology Opportunity Costs - The cost of forgoing the chance to earn interest (or profit) on investment funds. Question: Is it in my best interest to keep my home because it is all paid for? I’m a retired person living with my son, and I have rented my former home, valued at about $185,000, for $400 per month.”

Cost Terminology There is little reason to continue owning your former home as a rental. To see this, consider the opportunity cost, i.e., the return you are giving up, of ownership. The same $185,000 invested in secure U.S. Treasury bonds at 7% will provide almost $13,000 in yearly income. This is many times what is obtained from continual rental. Your Thoughts?

MIE 754 - Class #1 Manufacturing & Engineering Economics