Вы находитесь на странице: 1из 16

Engineering Economy

Chapter 2
Cost Concepts and Design Economics

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
The objective is to analyze
short-term alternatives when
the time value of money is not
a factor.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.1 Cost terminology
• Fixed cost ….
• Variable cost….
• Incremental cost: ….
• Direct cost ….
• Indirect cost: …. (E.x: overhead )
• Standard cost:.
It plays an important role in cost control and other
management functions.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Some useful cost terminology
• Cash cost: … (in cash flow).
• Book cost: …. (e.x: depreciation)
• Sunk cost: ….
• Opportunity cost ... (foregone).
• Life-cycle cost… the summation of all costs related to a
product, structure, system, or service during its life span.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.2 The general economic environment

1. The general price-demand relationship


p = a - bD
where
p: price,
D: demand, and
a & b are constants that
depend on the particular
product or service.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2. The total revenue function

Total revenue is the product of the selling price per


unit, p, and the number of units sold, D.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
a. How to determine the demand that maximizes revenue.

First derivative, the optimal


demand is,

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
b. How to find maximum profit.
Profit = TR – TC.

Where:

cv : variable costs.
CF: Fixed costs.
First derivative, the value of D that maximizes profit.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
c. How to find revenue/cost breakeven.
Breakeven is found when total revenue = total cost.

-Example 2.4 and 2.5

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Pause and solve

Acme Manufacturing is a major player in the lawn sprinkler


business. Their high-end sprinkler is used commercially,
and is quite popular with golf course greens keepers. In
producing these sprinklers Acme’s fixed cost (CF) is
$55,000 per month with a variable cost (cv) of $15.50 per
unit. The selling price for these high-end sprinklers is
described by the equation p=$87.50 – 0.02(D).

a)What is the optimal volume of sprinklers? Does Acme


make a profit at that volume?
b)What is the range of profitable demand?

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Quiz/ Exercise
A contractor has a choice of two sites on which to set up the asphalt-mixing plant.
It required 50,000 yr3 of mixed-asphalt-paving material and 4 months.

Cost factor Site X Site Y


Rental fee/month $1,500 $4,500
Setup & remove fee $12,000 $25,000
Hauling expense $1.1/yr3-mile
Hauling distance 6.5 miles 4.5 miles
Operator expense 0 $2,000/month

a.Compare the two sites in their fixed, variable & total costs. Which’s the better
site?
b.For the selected site, how many cubic yards of paving material does the
contractor have to deliver before starting to make a profit if paid $8/yr3
delivered to the job location?
Copyright ©2009 by Pearson Education, Inc.
Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.3 Cost-Driven Design Optimization
Engineers must consider cost in the design of
products, processes and services.

• “Cost-driven design optimization” is critical in


today’s competitive business environment.
• In our brief examination we examine a single
primary cost driver.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Two main tasks are involved in cost-driven design
optimization.

1. Determine the design variable.


2. Select the best alternative, each with its own
unique value for the design variable.

Cost models are developed around the design


variable, X.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Optimizing a design with respect to cost is a four-
step process.
• Identify the design variable that is the primary cost driver.
• Express the cost model in terms of the design variable.
• For continuous cost functions, differentiate to find the
optimal value. For discrete functions, calculate cost over a
range of values of the design variable.
• Solve the equation in step 3 for a continuous function. For
discrete, the optimum value has the minimum cost value
found in step 3.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Here is a simplified cost function.

where,
a is a parameter that represents the directly varying cost(s),
b is a parameter that represents the indirectly varying cost(s),
k is a parameter that represents the fixed cost(s), and
X represents the design variable in question.

_ Example 2.6

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.4 Present economy studies .
Alternatives are being compared over one year or less.
• Rule 1: When revenues and other economic benefits vary
among alternatives, choose the alternative that maximizes
overall profitability of defect-free output.
• Rule 2: When revenues and other economic benefits are
not present or are constant among alternatives, choose the
alternative that minimizes total cost per defect-free unit.
– Read case study: the economics of daytime running
lights (page 71-73)
– Problems: 2.2, 2.3, 2.12, 2.18, 2.25, 2.28, 2.30, 2.44.

Copyright ©2009 by Pearson Education, Inc.


Engineering Economy, Fourteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.

Вам также может понравиться