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CHAPTER 2
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Profit is maximum where
Total Revenue exceeds
Total Cost by greatest amount Profit = TR - Ct d (TR ) dC
Max. Profit at t
Maximum
dD dD
Profit
Ct = Cf + cv D
Cost / Revenue
Profit
Total Revenue
Cf
Quantity ( Output )
D1 D* D2 Demand
D1 and D2 are breakeven points
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PROFIT MAXIMIZATION D*
Occurs where total revenue exceeds total cost by
the greatest amount;
Occurs where dTR/dD = d Ct /dD;
Profit = (a D b D2) (Cf + cv D), or
Profit = - b D2 + (a cv) D Cf, then at
Positive and large (a cv) D produce positive profit
and avoid negative demand.
Max. Profit , D* = [ a - cv] / 2 b, then check
d2(profit)/dD2 < zero = -2 b, to be sure that you
6 dont have an inflection point.
BREAKEVEN POINTS D1 and D2
Occurs where TR = Ct
( aD b D2 ) = Cf + cv D
- b D2 + [ a - cv ] D - Cf = 0, Solve for Breakeven
Points to get D1 and D2 [To have at least one
breakeven point (a - cv) > 0, to have zero for the Left
Side of the equation]
Using the quadratic formula:
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(a cv ) (a cv ) 4(b)(C F )
2 2
D
'
2b
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2.3 Cost driven design optimization
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COST-DRIVEN DESIGN OPTIMIZATION PROBLEM COST TYPES
1. Fixed cost(s)
2. Cost(s) that vary directly with the design variable
3. Cost(s) that vary 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.)
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GENERAL APPROACH FOR OPTIMIZING A DESIGN
WITH RESPECT TO COST
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Practice Exercise
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Total annual cost (TAC) = Fixed Cost + Cost of Heat
Loss
TAC = 450X + 50 + 4,8/X1/2.
D(TAC)/dx = 0 = 450 2.40/X3/2
X3/2 = 2.40/450 = 0.00533
X* = 0.0305 meters
d2 (TAC)/dX2 = 3.6/X5/2 > 0 For X >0
Since the second derivative is positive, X* = 0.0305
meters is a minimum cost thickness.
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2.4 PRESENT ECONOMY STUDIES
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The Production Possibilities Curve
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Economic Growth
If an economy is operating at a point on the production
possibilities curve, all resources are used, and they are
used as efficiently as possible.
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Example - Make versus Purchase Studies
Given:
The company is currently purchasing a part and is
considering manufacturing the part in-house. This
company is not operating at full capacity, and no other use
for the excess capacity is contemplated. Unit costs are
given below.
Find:
Should the part be made in-house or purchased?
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Solution - Make versus Purchase Studies
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Summery
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