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CHAPTER 17

COST EVALUATION
17.1
From Eq.(16.19) which adjusts cost for a size or capacity difference,
x

L
1000
C1 C0 1 C0

100
L0

0.61

where the exponent of 0.61 comes from Table 16.4 for

a cyclone dust collector. Note that while the new unit has 10 times the capacity as the unit
purchased in 1985 will not cost 10X more, because of economy of scale. However, the
purchase cost will have increased because of inflation in the 22 years since it was purchased
in 1985. Assuming cost inflation in of 5% per year, the original cost of $35,000 is now
35,000(1+0.05)22 35, 000 2.92526 $102, 389
equivalent to
.
The estimate of the cost is
0.61
0.61
1000
C1 102, 389
102, 389 10 102, 389 7.59 $777, 000

100
Note that this estimate does not include the cost of shipping, installation at the plant, and
necessary electrical and mechanical auxiliaries. The best estimate of the cost would be a firm
quotation from the supplier. A better estimate of the cost escalation from 1985 could be
obtained using Eq.(16.18) with the producer price index (PPI) at www.bls.gov for the type of
equipment involved, since an estimate of 5% inflation most likely overestimates the actual
situation.
17.2
Typical costs for the overseas subcontractor and the U.S. shoe company that sells a name
brand shoe to a retail chain might be:
Overseas subcontractor
Labor per shoe
Materials
Shipping and import duty
Operating cost
Profit
U.S. brand name shoe company
Purchase from subcontractor 20.00
Research and development
Promotion and advertising
Sales, G&A
Profit

2.75
9.00
3.50
3.00
1.75

0.25
4.00
5.00
6.75

17.3
This is an example of a break-even point problem. Soft tooling typically makes the part with
standard machines, universal dies and fixtures, and sometimes with tooling made quickly
from softer materials like aluminum. A process developed with soft tooling can get under way
quickly, making parts with little automation and low tooling cost. However the life of the
tools is short and the cost of making a unit part is higher than if more time and money were

spent making hard tool steel dies using highly automated manufacturing equipment. Soft
tooling works best when the number of parts, Q , is relatively small; hard tooling works best
when the quantity of parts needed is large. The objective of this problem is to find the breakeven quantity of parts QB below which soft tooling is the way to go, and above which using
hard tooling is a better decision.
At the break-even point, QB, the cost of using hard tooling equals the cost of using
soft tooling. The chief cost elements are:
the cost of tooling. CH = $7500 and CS = $600
the cost of tool setup. SH=$60 and SS = $100. Parts are made in batches, b, (lots) of 500
units.
the cost to make one part. CpH = $0.80 and CpS = $3.40
At the break-even point
Q
CH B S H C pH QB CS
b
QB

C H CS

SS SH
C pS C pH
b

Q B

S S C pS QB

7500 600
6900

2574
100 60
2.68
3.40 0.80
500

The break-even point gives the total production at which the hard tooling approach becomes
more cost effective than soft tooling. Since the total production is 5000 units, the best
decision is to use hard tooling if the time required to make to tools and prepare the production
machines is compatible with the product development schedule.
The units for the basic equation above are:

batch $
$
$ part units

part units batch part units

part units $

17.4
Figure 16.1 should serve as a guide for breaking down the costs listed in the problem
statement.
Prime cost
Direct labor
Direct material
Direct expenses
Direct engineering
Direct engr. expenses
Factory expense
Plant utilities
Plant & equip. depreciation
Warehouse expense
Taxes & insurance

950,000
2,150,000
60,000
90,000
30,000
3,280,000
(1)
70,000
120,000
60,000
50,000
300,000

(2)

General and administrative expenses (G&A)


Plant manager and staff
180,000
Administrative salaries
120,000
Office utilities
10,000
310,000

(3)

Manufacturing cost = (1) + (2) +(3) = 3,890,000 (4)


Sales expense = 100,000

(5)

Total cost = (4) + (5) = 3,990,000


(6) This ignores corporate
overhead, which should be small for a company of this size.
The problem states that the profit margin is 0.15 or 15%. One is tempted to multiply the total
cost by 0.15 to get the profit, and add this to cost to find the selling price.
However, this is not strictly correct. By definition:
profit P
profit margin =
0.15
sales S
But, from Eq.(16.2),
Sales (S) Total cos t CT + Profit (P)
S = CT + P = CT 0.15S;

CT
3, 990, 000

4, 694,118
0.85
0.85

The unit selling price of turbine is

$4, 694,116
$78, 235
60 units sold

17.5
The calculation will be done with unit costs developed by the following equation.
Cu CM C L OH mfg
CM 20 gram

lb
$
2.20 $0.0969
454 gram
lb

$/lb
(Since polymers are made from oil-based feedstock, this price could be at least doubled
today.)
$
1
h
CL 20
$0.0143
h 1400 parts
per part. The $20 per h includes labor rate plus
amortization of mold costs.
OH mfg (0.0969 0.0143)(0.40) $0.0445
This is the manufacturing overhead cost per
part.
Cu 0.0969 0.0143 0.0445 $0.1557
The corporate general and administrative cost (G&A)
Total unit cost = 0.1557 + 0.0234 = $0.1791

GA 0.15(0.1557) 0.0234

Selling price = total cost + profit = 0.1791 + 0.1(0.1791) = $0.1970 per unit
Note that in this problem the profit is given as Profit is 10 percent. This implies a
percentage of the total cost, as shown above. If the profit was stated as profit margin is 10
percent then the method shown in Problem 16.4 would apply.
17.6
The problem asks to determine the cost for melting a pound of high-grade steel by two
competitive processes, vacuum arc remelting (VAR) and the electro slag remelting process
(ESR). Information on both of these processes can be found in Wikipedia. As worded, the
problem asks only for the processing cost, which would be the labor, process expendables
( water, slag, and electricity a major item), as well as manufacturing overhead and
deprecation on both the furnaces and the space. It does not include the actual cost of the steel
ingots which are purified by remelting in the process. Costs are on an annual basis.
VAR
ESR
1. Direct labor (3 shifts per day; 3 x 89,00)
$267,000
2. Manufacturing overhead (1.4 x DL)
$373,000
3. Power cost
VAR:0.3 x 1000 x $0,10 =30 $/h; 15x8x50 =6000h/yr
ESR: 0.5 x 1250 x $0.10 =62.5$/h; 6000 h/yr
$375,000
4. Cooling water
$5,500
$6,800
5. Slag
$42,000
6. Annual depreciation on furnace
$90,000
(straight-line, 10 yr life)
7. Depreciation on factory space (25 year life)
$1600
Total annual operating cost
$1,155,400

$267,000
$373,800
$180,000

$130,000
$1600
$957,100

Total annual production


VAR: 1000 lb/h x 6000 h/yr = 6,000,000 lbs
ESR : 1250 lb/h x 6000 h/yr = 7,500,000 lbs/yr
Melting cost per lb of steel
0.1595
$0.1540