Introduction to

Engineering Economy
Module 1

CE Department – College of Engineering

Engr. Marbel Perez Engineering Economy – CVE 210
Bulacan State University
Module 1 – Engineering Economy CVE 210 Engr Marbel D Perez

Introduction to Engineering Economics

Title of Lessons in this module

1.1 Principles of Engineering Economy

1.2 Engineering Economy and the Design Process

1.3 Cost Concepts for Decision Making

Duration: 6 hours

Introduction

In Engineering Economics, we will study the decisions that affect our day to day

lives. It deals with studying which from a given set of choices will yield the most

economical result. It deals from deciding to whether you should repair or replace, to

making feasibility studies if a certain highway will produce economic benefits to a

town. In this module we are set to learn the principles and the process involved in

making engineering judgement in terms of its economic feasibility. In this module we

will learn how to identify the factors that goes into the decision-making process of

Engineers.

Objectives

1. To be able to identify the Principles of Engineering Economy and use it in

scenarios where Engineering Judgement is vital

2. To know and follow the Engineering Economy Design Process

3. To learn the Cost Concepts for Decision Making

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Pre-Test

This part of module is designed to assess your previous knowledge in topics

regarding Engineering Economy. Write your answers at back of your module.

1. Engr. Dela Cruz is deciding on whether to buy a brand new or used truck for

his construction company. The table below shows the expense and

maintenance cost for both types of trucks.

Initial Price Estimated Maintenance Service life

Cost/yr.
Brand New 1,500,000 50,000 15 years
Used 500,000 150,000 5 years
From the data above should the company buy brand new or used? Assume

that the truck will be used for 5 years only.

2. A certain professor has a dilemma on whether she should buy an entry level

or high-end laptop for online class. It is also worth noting that if he elects to

buy a high-end model, he can use it for his construction sideline.

Cost Earning Potential/month

High End 50,000 12,000
Entry Level 15,000 -
Identify and explain the factors that he could use to help him decide which

model he would buy.

3. Are planned costs per unit of output that are established in advance of actual

production or service delivery. They are developed from anticipated direct

labor hours, materials, and overhead categories (with their established costs

per unit).

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1.1 Principles of Engineering Economy

Engineering Economy is a vital subject that engineers in every field needs to

learn and understand. It helps Engineers in deciding in almost every step of the

way. Always remember that as Civil Engineers we have two very equal

principles. First our designed structures, be it buildings, roads, dams and etc.

must be safe and stand the test of time. Second but also as important is that we

must design Economical Structures, this is were Engineering Economy comes in.

This subject will guide us as how to decide as an Engineer.

In every discipline there will always be foundation and principles in every topic

that it tackles. In our subject of Engineering Economy there are 7 Principles that

should be followed whenever we need an Economic Decision in our problems.

Which is as follows.

Create Alternatives

Analyze the problem rigorously then define the problem. Develop alternatives for

the problem. Make as many alternatives as possible as the final solution that you

will use in your problem is one of the alternatives that you developed. The

alternatives should be clearly defined for the subsequent analysis.

Focus on the Differences

After developing alternatives, consider the future effects of each alternative, is it

cheaper in the long run? Does it satisfy the conditions set by the problem? Will it

actually solve the problem? It is important to take note that you should only

consider the future outcome of your alternatives.

Use a Consistent Viewpoint

Every alternative developed should be analyzed from a single viewpoint. If you

consider the first alternative from a buyer’s perspective all the other alternatives

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should be analyzed from the buyer’s perspective. You should be consistent in

using viewpoints in order to create a sound and scientific decision.

Use a Common Unit of Measure

In order to simplify the analysis of alternatives, you should use a common unit of

measure as to reduce unnecessary confusions. For example, if you used Cost

per month in your first alternative be sure to use it in all your alternatives, for you

to be able have a clearer picture of the alternatives you created.

Consider All Relevant Criteria

Be sure to consider every possible criterion, leaving a critical criterion in your

alternatives is a mistake in your decision making as it leaves more room for

mistakes and uncertainties in the outcome of the project.

Make Risk and Uncertainty Explicit

Risk and uncertainty are a vital part for the outcome of your project. For example,

you may have an alternative where you may earn higher profits but it is limited by

weather, politics or any other uncertainties vs a lower profit alternative but is not

limited by such uncertainties.

Revisit Your Decisions [1]

As is true in every engineering subject, always check and revisit your decision as

much as possible as it will give you a clearer picture of your decision. It also

helps that we sometimes overlook some key criteria in our decision and revisiting

those can help you determine if you made the right choice.

Activity 1

1. Your friend owns a four-door apartment, he consults you on to what he should

for his apartment. He tells you that he is having a hard time in paying for his

mortgage for the apartment, as he barely breaks even from the rent that he

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collects. Using the Principles of Engineering Economy, create alternatives that

he can do, choose one of your alternatives and explain why you chose that

alternative. Write your answer at the back of this page.

Hint: Be as creative as you can, say he can renovate his apartment and raise

rent, or he can restructure his loan, he can look at the market for renters and

increase his rent cost outright, restructure his loan and many more options.

1.2 Engineering Economy and the Design Process

Engineering Economy is simply a collection of techniques and problem-solving tools

that are applied to engineering problems. Engineering problems involving money are

easier to solve and understand when you apply the Engineering Economic

Analysis Procedure. A successful solution to common engineering problem

involves using the Engineering Design Process (there are many sources as to what

is the actual Engineering Design Process, for our topic, we will use the definition

from Dr Sullivan and Wicks in their book, Engineering Economy). For us to be able to

make a good engineering decision you must be able to apply both the process of

Engineering Economic Analysis and the Engineering Design Process to your

decision-making process. The Principles of Engineering Economy itself is loosely

based on the Engineering Design Process. Below is a table which shows the

relationship between Engineering Economic Analysis and the Engineering Design

Process.

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Source: page 7 & 18, Engineering Economy, 16th Edition by William G. Sullivan and

Elin M. Wicks

The column on the left contains the Engineering Economic Analysis Procedure,

which uses Engineering Principles tackled in the previous lesson. The column on the

right is the Engineering Design Process as defined by the Authors of the said book.

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In every problem concerning the cost/economic viability of a certain project/decision

you should always follow the Engineering Economic Analysis Procedure.

Activity 2

1. You are hired as a Site Engineer for a DEF Developers. You are asked to

review the plans for a 2-storey house inside your site. It is your understanding

that the reinforcement bars used for the columns of the house are 32mm in

diameter but your supplier can only provide 22mm, 25mm and 16mm

diameter bars. The columns in the said project is designed with the total area

of steel reinforcement equal to 3216mm 2. The project manager is also

reminding you that you finish concreting the 3 columns within two weeks. Take

note that for every day you delay your two-week deadline the developer loses

Php 500/ day

Speed of
Diameter of Rebar Price / 6m Availability
Installation
32 mm 500 .5 day/ column 2 months from now
25 mm 400 1 day/ column 5 days from now
22 mm 300 1.5 days/ column 1 week from now
16 mm 250 2 days/ column Available
Using the Engineering Economic Analysis Procedure, choose which of the

rebar you are going to use for the project while minimizing cost. Disregard

spacing considerations of the bars. Write your answer in the back of this

page. Present it in a manner where I can see the steps of Engineering

Economic Analysis in every part of the problem.

1.3 Cost Concepts for Decision Making

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Fixed, Variable, and Incremental Costs

Fixed costs are cost that will remain, even you produce something or not. An

example of this are taxes, rent, insurance, administration cost (administrative

employee salaries) and the likes. Fixed costs are generally not affected by slow

down or growth in production. It normally tends to go down in per unit cost as

production increases.

Variable costs are costs that are generally affected by the amount of production.

This costs typically increase as production increase. Variable costs tend to stay the

same in terms of per unit cost as production increase or decrease. Labor and

Materials are common examples of variable cost.

An incremental cost (or marginal cost) are additional costs incurred as if you

produce one more unit of a product, as such incremental costs are generally lower

than your average unit cost. It is important to note that incremental costs are a type

variable costs, as it fluctuates in terms production volume, but unlike variable costs it

is solely dependent in the production volume of a certain product. Raw Materials is

an example of incremental cost.

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An example of Incremental cost is when your company produces 20,000 units of a

certain product for Php 500,000 then you learned that if you want to increase your

production to 25,000 units the total cost will only be Php 575,000.

No. of Units produced Total Cost Unit Cost

20,000 500,000 Php 25/unit

25,000 575,000 Php 23/unit

The Incremental unit cost of that product will be Php 2.00 per unit.

Direct, Indirect, and Standard Costs

Direct costs are costs that can easily be associated with the production of a certain

product. This cost can easily be linked to the products total production cost. Material

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and labor costs are examples of direct costs. As these costs directly contribute to the

cost of the production of a product.

Indirect costs are costs that you cannot directly assume in computing for the unit

cost of a certain product. This is due to these costs as being spent on generally on

the company as a whole and not on the products as direct costs are. Administrative

Costs, General Supplies, Insurance, Rent and Utilities are some examples of indirect

cost. Indirect Cost are sometimes referred as Overhead Cost.

Standard costs are costs that are used in estimating the actual cost that will be

spent in manufacturing. These costs are used to forecast the actual cost that will be

spent on a project therefore there will be some discrepancies between the two.

Standard Cost are usually used for Estimating, and for Bidding purposes.

Sunk Cost

In order for a cost to be considered as Sunk Cost it must satisfy these three

conditions.

1. It was incurred in the past

2. Cannot be recouped

3. Independent of Future Events

In order for you to understand the concept of sunk cost better I will give you this

example. Let us assume that a company, ABC Corporation, spends Php 50,000 for

its rent, their equipment was purchased for Php 150,000. Let say that their product

costs them Php 15 to produce and sells Php 20, but if they make their product more

premium, it will cost them Php 20 to produce but sell for Php 30. The company then

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decides to make the premium version as it will give them Php 5 more profit than the

standard model.

In that scenario both the rent and equipment purchased will be considered as sunk

cost as company did not factor those cost in their decision.

Activity 3

Determine what type of cost these expenditures are, take note that there may be

more than two answers

 Php 50,000 Salary for the Office Secretary – Indirect, Fixed

1. Php 1.2M used to purchase office computers

2. Php 30,000 used for purchasing of rubber used in tire manufacturing

3. Php 45,000 used for salary of factory workers

4. Php 100.00 pesos given to your driver as snacks allowance

5. Php 300,000 used for upgrading machinery in your plant

6. Php 15,000 used to pay for Electricity Consumption of your main office

Learning Insights

1. In your own words, explain how you understand each Principle of Engineering

Economy and why it is important to include it to your decision-making process

as a future engineer. (Put your answers in the back of the module if it cannot

fit in this page)

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2. Create a Venn Diagram illustrating the relationships of the different costs

discussed in lesson 1.3

Post Test

1. Engr. Dela Cruz is deciding on whether to buy a brand new or used truck for

his construction company. The table below shows the expense and

maintenance cost for both types of trucks.

Initial Price Estimated Maintenance Service life

Cost/yr.
Brand New 1,500,000 50,000 15 years
Used 500,000 150,000 5 years
From the data above should the company buy brand new or used? Assume

that the truck will be used for 5 years only.

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2. A certain professor has a dilemma on whether she should buy an entry level

or high-end laptop for online class. It is also worth noting that if he elects to

buy a high-end model, he can use it for his construction sideline.

Cost Earning Potential/month

High End 50,000 12,000
Entry Level 15,000 -
Identify and explain the factors that he could use to help him decide which

model he would buy.

B. Determine what type of cost these expenditures are, take note that there may

be more than two answers

1. Php 50,000 bonus given to main office employees.

2. Php 30,000 used in utilities payments.

3. Php 500,000 used to purchase a new truck.

4. Php 30,000 used to increase stock of raw materials.

5. Php 25,000 payment of rent.

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SUGGESTED READINGS AND WEBSITES

Engineering Economy, 16th Edition by William G. Sullivan and Elin M. Wicks

http://www.investopedia.com

Glossary

Analysis - detailed examination of the elements or structure of something.

Alternative - a proposition or situation offering a choice between two or more things

only one of which may be chosen.

Cost - an amount that has to be paid or spent to buy or obtain something.

Decision Making - the action or process of making decisions, especially important

ones.

Payment - the action or process of paying someone or something or of being paid.

Principle - a general scientific theorem or law that has numerous special

applications across a wide field.

Viewpoint - the circumstances of an individual that conduce to such an attitude

References

Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2013). Engineering Economy.

Pearson Education, Limited.

Tiongson, J. R., & Rojas, R. A., Jr. (2006). 1001 Solved Problems in Engineering
Mathematics (Second ed.). Cebu City: First Benchmark Publisher,Inc.

Padilla, P. B., Jr. (2001). Board Exam Guide in Engineering Mathematics. Manila:
Padilla Civil Engineering Review School and Publishing.

Google. (n.d.). Retrieved from https://www.dictionary.com/browse/google

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Answer Key (Post Test)

B.

1. Fixed; Indirect

2. Fixed; Indirect

3. Sunk Cost

4. Direct; Variable

5. Fixed; Indirect

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