ENGINEERING COSTS
CONCEPTS
AND
COST ESTIMATING
MODELS
Engineering Economy, William G. Sullivan, Elin
M. Wicks, C. Patrick Koelling; chapter 2 & 3
Engineering Economic Analysis, Donald G.
Newnan, Ted G. Eschenbach, Jermo P. Lavelle;
chapter 2
The annual fixed costs for a plant is $100,000, and the
variable costs is $140,000 at 70% utilization of available
capacity, with sales of $280,000. What is breakeven
point in units of production if selling price per unit is $40?
FC = $100,000
VC at 70% utilization = $140,000
Sales (Revenues) at 70% utilization = $280,000
P = $40 TR = TC
TR = PQ TR/P = Q 280,000 / 40 = Q Q = 7000 units
VC = VQ VC/Q = V 140,000 / 7000 = V V = $20/unit
𝐅𝐂 100,000
𝑸𝑩𝑬 = = = 𝟓𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬
2 (𝐏−𝐕) (40 −20)
A company is investigating to buy a new production
machinery as part of its operations. Three alternatives
have been identified: HOME WORK
Determine the ranges of production (units produced per
year) over which each alternative would be
recommended up to 30,000 units per year.
(Hint: solve it graphically on graph paper.)
Engineering Economy by William
G. Sullivan, Elin M. Wicks, C.
Patrick Koelling (17th ed.
2018).pdf
Example 2-8 page 43
Example 2-9 page 44
Example 2-10 page 45
Example 2-12 page 12
The following results were obtained after analyzing the operational
effectiveness of a production machine at two different speeds:
A set of unsharpened tools costs $1,000 and can re-grind 20 times.
The time required to change and reset the tools is 1.5 hours, and
such changes are made by a tool-setter who is paid $25/hour.
The production machine operator is paid $20/hour. Variable overhead
on the machine is charged at the rate of $27/hour.
At what speed should the machine be operated to minimize the total
cost 6per piece?
Solution
Speed A
Output = 400/hr
Productive time = 20hrs
Cost of unsharpened tool set = $1000 (which can re-grind 20 times)
Idle time = 1.5 hrs
Tool setter cost = $25/hr
Machine operator cost = $20/hr
Variable overheads = $27/hr
Cost per unit = ???
Cycle Time = Idle time + Productive time
7
Cycle time (speed A) = 1.5 hrs + 20 hrs = 21.5 hrs
Output/cycle = 20 x 400 = 8000 units
Cost of unsharpened tool set/cycle = 1000/20 = $50
Tool setter cost/cycle = 25 x 1.5 = 37.5
Machine operator cost/cycle = 20 x 20 = $400
Variable overheads/cycle = 27 x 21.5 = $580.5
Total cost (Speed A)/cycle = 50 + 37.5 + 400 + 580.5 =
$1068
Per unit cost (Speed A) = 1068/8000 = $0.1335
8
Speed B
Cycle Time = Idle time + Productive time
Cycle time =
Output/cycle =
Cost of unsharpened tool set/cycle =
Tool setter cost/cycle =
Machine operator cost/cycle =
Variable overheads/cycle =
Total cost (Speed A)/cycle =
Per unit cost (Speed B) = ----------
9
A painting operation is currently performed by a
production worker at a cost of $1.15 per unit. A
robot spray-painting machine, costing $16,000,
would reduce the worker cost to $0.18 per unit. If
the device would be valueless at the end of 4
years, what is the minimum number of units that
would have to be painted each year to justify the
purchase of the robot machine?
10
Break even condition between worker and robot:
1.15 Q = 16000 + 0.18 Q
Solve for Q = 16494.8454
Let Q = 16493 then
Worker cost = $18966.95 < Robot cost = $18968.74
Let Q = 16496 then
Worker cost = $18970.4 > Robot cost = $18969.28
Therefore, atleast 16495 units (4124 per year) must
be painted to justify purchase of a robot.
11
Picnic Services Company has designed a new Camping kit. It
has received an initial order for 8 units of its new kit. Following
information is regarding the assembly of a kit.
Direct Material costs = $2000 per kit
Direct Worker time for assembling first kit = 200 hours
Learning curve for Worker time of assembling kits = 85%
Direct Worker costs for assembling a kit = $150/direct worker hr
Equipment cost related indirect manufacturing costs =
$60/direct worker hour
Material handling cost related indirect manufacturing costs =
50% of direct material cost 12
Calculate:
1. Number of direct worker hours required to assemble
the first 8 Kits.
2. Calculate Total Manufacturing cost of assembling
the first 8 Kits.
3. Calculate Total Manufacturing cost of assembling
the 9th, Kit.
13
Answer:
1. Direct Worker hours required to assemble 8 Kits
= 1283.5 hours
2. Total Manufacturing cost of assembling 8 Kits =
2000*8 + 150*1283.5 + 60*1283.5 + 0.5*2000*8
=
3. Total Manufacturing cost of assembling the 9th,
Kit = ?
14
