This course is concerned with making good economic decisions in engineering презентация

ARMENIA
IE340-ENGINEERING ECONOMICS
SPRING SEMESTER, 2017

decisions often involve non-engineers
Managers
Accountants
Etc.
You need to be able to communicate with these people, so you need a common language

Introduction

costs
Several cost situations occur frequently
People have developed terms to describe these
You need to know these terms to
Understand what others are saying to you
Be able to persuade others that you know what you’re doing and therefore should be listened to

Introduction (cont.)

products
Indirect materials (lubrication oil, etc.)
Electric power and other energy inputs
Capital (money), which is used to pay for:
Land and buildings
Producer goods (e.g., tools, equipment)
Taxes

What Inputs Do They Use?

(indirect) costs

Of these, overhead costs are often the most complicated and troublesome

Cost classification (direct and overhead)

easily measured
Can be conveniently allocated to a particular category (e.g. a product or service)
Examples:
Cost of steel used for making bolts
Salary of a nurse on cardiac surgery ward

Direct costs

they help support multiple products or services
Examples:
Depreciation, taxes, insurance, maintenance; electricity; general repairs; common tools
Supervisors, engineers, and other administrative/clerical personnel
Can also include materials and labor for inspection, testing, etc.

Overhead (indirect) costs

or service is produced or delivered
They are developed from anticipated direct labor hours, materials, and overhead categories

Play an important role in cost control and other management functions
Comparing the actual cost with the standard cost
Estimating future manufacturing costs
Preparing bids on products or services requested by customers

direct and indirect costs, but not capital

Examples
Materials and supplies,
wages and salaries,
fuel, water, electric power,
taxes, insurance

Operating expenses

activity started:
Occurs only once for any given activity
Typically assumed to be paid in year 0
Typically used for capital (land, buildings, tools, equipment), not operating expenses

First Cost

insurance, lease rentals, interest, sales programs, administrative expenses, research, heat, light, janitorial (doorkeeper) services
Fixed costs are only relatively fixed, they may change when:
Large changes in usage of resources occur
When plant expansion or shutdown is involved

Fixed Costs

only direct costs
May (or may not) remain constant per unit of product
Examples:
Materials costs, direct labor, direct electric power

Variable Costs

1: cost is $250 N, where N is number of units of product made
Here cost is purely variable (no fixed cost)
Average cost is (250 N)/N = $250
Example 2: cost is $6000 + $100 N
Average cost is $100 + 6000/N (decreases with larger N; economy of scale)

Average cost

fewer of the product
For Example 2 (cost = $6000 + 100 N):
N = 100: cost is $16,000
N = 101: cost is $16,100
Here marginal cost is $100, but average cost (at N = 100) is $160
So average and marginal cost may differ!

Marginal (Incremental) cost

(Cost equation = $50 + $1 N)
If we make 10 units:
Total cost is $60
Average cost is total cost/number of units:
$60/10=$6 per unit
Marginal cost is the extra cost (additional cost) if we increase our production by 1 unit: $1 per unit

Marginal (incremental cost): an example

deciding whether to increase production or not
We need to compare marginal costs to marginal benefits
In our example, marginal cost<High fixed cost creates economies of scale
Marginal cost can also be > average cost

Marginal (incremental cost)

that affects a one unit change in output, this implies that this equals 1/MPL (marginal product of labor)

So, when marginal cost is increasing (decreasing) the marginal product of labor is decreasing (increasing)

Marginal (incremental cost)

but not all recurring costs have to be variable
A fixed cost can be recurring cost, e.g. Office space rental for architectural and engineering service
An example of a nonrecurring cost can be the cost of constructing a plant or purchasing a piece of land

Recurring and Nonrecurring Costs

something
Often expressed in dollar terms; but not always:
Opportunity cost of this lecture is 1 hour’s sleep, or more

Opportunity cost

past costs
Sunk costs are generally irrelevant to decision

Example:
If a firm sinks $1 million on an enterprise software installation, that cost is "sunk" because it was a one-time thing and cannot be recovered once expended.
Room painting

Sunk Costs

during its service life

Major subdivisions:
Acquisition cost
Operation cost
Maintenance cost

Life-cycle cost

Advantages:
simplicity
low cost
Disadvantages:
future might not be like the past

Accounting Method

pounds of material)
Conjecture about the future is made on the basis of the knowledge on the capacity of equipment, capabilities of people…
Useful when historical data is unavailable

Engineering Method

find a functional relationship between changes in costs and factors like output rate
The most reliable method when data is available

Statistical Method

the quantity demanded:
p = a - b D

a = Y-axis (quantity) intercept, (price at 0 amount demanded);
b = slope of the demand function; amount by which D increases for each unit decrease in price.

D = (a – p) / b

Neccessities, Luxuries, and Price Demand

For 0 ≤ D ≤ a/b, and a > 0, b > 0

Revenue Function

= (a – bD) x D
= aD – bD2

MR => dTR / dD = a –2bD = 0 =>

D’ = a / 2b

D’ = a / 2b

TR max

TR max = aD’ - bD’2 = a2 / 2b - a2 / 4b = a2 / 4b

Price = a - bD

(CF + CvD) = - bD2 + (a-Cv)D-CF

Max Profit => d(profit)/dD = 0 =>
a – Cv - 2bD = 0

D* = a – Cv / - 2b

Total Cost

aD – bD2 = CF + CvD =>

- bD2 + (a-Cv)D-CF = 0

The solutions for this quadratic equation would be:

-(a-Cv) + or – [(a-Cv)2 – 4(-b)(-CF )]1/2

D =

2(-b)

of price.

the quantity demanded:
p = a - b D

a = Y-axis (quantity) intercept, (price at 0 amount demanded);
b = slope of the demand function;

D = (a – p) / b

PRICE

Total Revenue = p x D

= (a – bD) x D

DEMAND QUANTITY ( OUTPUT )

( Output )
Demand

Cf

Ct

D’1

D’2

D*

Profit

Total Revenue

Maximum
Profit

Profit is maximum where
Total Revenue exceeds
Total Cost by greatest amount

D’1 and D’2 are breakeven points

Marginal
Revenue

in consumer and commercial products made by several other manufacturing firms. The fixed cost (CF) is $73,000 per month, and the variable cost (cv) is $83 per unit. The selling price per unit is
p = $180 – 0.02(D)

Determine the optimal volume for this product, and
Find the volumes at which breakeven occurs; that is, what is the domain of profitable demand?

0

Optimal value of D that maximizes profit is
D* = (a – cv)/2b = 2,425 units per month

Total revenue = total cost (breakeven point)

-bD2 + (a – cv)D – CF = 0

D1’ = 932 units per month
D2’ = 3,918 units per month

price.

Break even occurs when:
Total Revenue = Total Cost
TR = p X D; p > cv; assume demand is immediately met

design products and services
Ensures engineers consider:
Initial investment costs
Operation and maintenance expenses
Other annual expenses in later years
Environmental and social consequences over design life

Cost driven design optimization

Design for the environment movement

This green-engineering approach has the following goals:
Prevention of waste
Improved materials selection
Reuse and recycling of resources

of an aircraft minimizes the total annual cost of owning and operating the aircraft

Select the best alternative, each with its own unique value for the design variable
Example: what insulation thickness is best for a home in Gyumri

Cost-driven Design Optimization Problem Tasks

indirectly with the design variable

Simplified Format of Cost Model With One Design Variable
Cost = aX + (b / X) + k

a - is a parameter that represents directly varying cost(s)
b - is a parameter that represents indirectly varying cost(s)
k - is a parameter that represents the faced cost(s)
X - represents the design variable in question
(In a particular problem, the parameters a, b and k may actually represent the sum of a group of costs in that category, and the design variable may be raised to some power for either directly or indirectly varying costs.)

Cost-driven Design Optimization Problem Cost Types

in terms of the design variable

Set first derivative of cost model with respect to continuous design variable equal to 0. (For discrete design variables, compute cost model for each discrete value over selected range).

Solve equation in step 3 for optimum value of continuous design variables

For continuous design variables, use the second derivative of the cost model with respect to the design variable to determine whether optimum corresponds to global maximum or minimum.

General Approach for Optimizing a Design With Respect to Cost

one year or less (I.e., influence of time on money is irrelevant)

Rules for Selecting Preferred Alternative

Rule 1 – When revenues and other economic benefits are present and vary among alternatives, choose alternative that maximizes overall profitability based on the number of defect-free units of output

Rule 2 – When revenues and economic benefits are not present or are constant among alternatives, consider only costs and select alternative that minimizes total cost per defect-free output

Present Economy Studies

cannot be based solely on costs of materials. Frequently, change in materials affect design, processing, and shipping costs.

Alternative Machine Speeds
Machines can frequently be operated at different speeds, resulting in different rates of product output. However, this usually results in different frequencies of machine downtime. Such situations lead to present economy studies to determine preferred operating speed.

Present Economy Studies

item in house, rather than purchase from a supplier at a price lower than production costs if:
direct, indirect or overhead costs are incurred regardless of whether the item is purchased from an outside supplier, and
The incremental cost of producing the item in the short run is less than the supplier’s price.
The relevant short-run costs of the make versus purchase decisions are the incremental costs incurred and the opportunity costs of resources

Present Economy Studies

manufacture of an item causes other production opportunities to be foregone (E.G., insufficient capacity)

In the long run, capital investments in additional manufacturing plant and capacity are often feasible alternatives to outsourcing.

Present Economy Studies

board foot. When the planer is operated at a cutting speed of 5,000 feet per minute, the blades have to be sharpened after 2 hours of operation, and the lumber can be planed at the rate of 1,000 board-feet per hour. When the machine is operated at 6,000 feet per minute, the blades have to be sharpened after 1-1/2 hours of operation, and the rate of planing is 1,200 board-feet per hour. Each time blades are changed, the machine has to be shut down for 15 minutes. The blades, unsharpened, cost $50 per set and can be sharpened 10 times before having to be discarded. Sharpening costs $10 per occurrence. The crew that operates the planer changes and resets the blades.

At what speed should the planer be operated?
At what speed should it be operated when only one job requiring 6,000 board-feet of planing is considered.

Example 2.13 – Best Operating Speed