ENGINEERING

ECONOMY

Prepared by: ANNA MARIE L. ARNOCO

Engineering Economy
It is a collection of techniques that
simplify comparisons of alternatives on
an economic basis. However, it is not a
method or process for determining what
the alternatives are but only after the
alternatives have been identified.
Engineering Economy and
Design Process

The five steps used for solving design problems are:

1. Define the problem
2. Gather pertinent information
3. Generate multiple solutions
4. Analyze and select a solution
5. Test and implement the solution
Principles of Engineering
Economy
Seven Principles
1. Develop the Alternatives
2. Focus on the Difference
3. Use a consistent viewpoint
4. Use a common Unit of Measure
5. Consider all Relevant Criteria
6. Make Uncertainty Explicit
7. Revisit your decision
Analysis and Selection of
Solution

Functional analysis
Industrial design/Ergonomics
Mechanical/Strength analysis
Electrical/Electromagnetic
Manufacturability/Testability
Product safety and liability
Economic and market analysis
Regulatory and Compliance
 Terms
Alternative - a stand alone solution for a given situation
Cash Flows the estimated inflows (revenues) and
outflows (costs) of money
Time Value of Money the change in the amount of money
over a given time period
Alterative Selection the process of choosing the best from
at least two alternatives which includes the DO NOTHING
alternative
Evaluation Criteria a criterion or combination of criteria is
used to identify the best alterative
Intangible factors non-economic factor that is difficult to
quantify but can tilt the decision in the direction of the
alternatives
Cost Concepts in Decision
Making
Cost
(accounting) it is the value of money that
has been used up to produce something
(economics) a cost is an alternative that
is given up as a result of a decision
Cost Concepts in Decision
Making
Classification of Cost
a) Association with cost object
Direct - conveniently and economically traceable
to the product
Ex. Direct Labor and Direct Materials
Indirect - non-traceable but must be allocated
Ex. Overhead Cost
Cost Concepts in Decision
Making
Classification of Cost
b) Reaction to the changes in Activity
Variable - fluctuates in total
Ex. direct labor, direct material, unit transportation
Fixed - remains constant in total
Ex. Insurance, taxes on facilities, administrative
salaries, rental payments and initial setup or installation
Cost Concepts in Decision
Making

A widely used cost model is:

Total Costs = Fixed Costs + Variable Costs

Whereas,

Profit = Price - Cost

Profit = Revenue - Investment
Present Economy Studies

It is concerned with selecting a best alternative where

all costs/revenues occur at same time so time value of
money doesnt matter.
Its basic method is careful comparison of Profitability
(typical in industry), or other measure of effectiveness
(MOE) (government or nonprofits)
Present Economy Studies

Types:

Comparison of Two Materials

Comparison of Two Machines
Make or Buy Decisions
Example
In connection with surfacing a new highway, a
contractor has a choice of two sites on which to set
up the mixing plant equipment. The contractor
estimates that it will cost $1.15 per cubic meter per
kilometer to haul the asphalt paving material from
the mixing plant to the job site. If site B is selected,
there will be an added charge of $96 per day for a
flagman. The job requires 50,000 cubic meters of
mixed asphalt paving material. It is estimated that
four months (17 weeks of five working days per
week) will be required for the job.
 Cost Factors Site A Site B
Average hauling distance 6 km 4.3 km
Monthly rental of site $1000 $5000
Cost to setup and $15000 $25000
remove equipment
Hauling expense $1.15 / m3/km
a) Compare the two sites in terms of their fixed, variable, and total
costs.
b) For the selected site, how much profit can be made if paid
$8.05 per cubic meter delivered to the job site?
 Solution
Fixed Costs Site A Site B
Monthly rental of site $1000 x 4 $5000 x 4
Cost to setup and $15,000 $25,000
remove equipment
Flagman wage 0 $96 x 85
Total Fixed Costs $19,000 $53,160

Variable Costs
Hauling expense
Site A = $1.15/m3/km x 6 km x 50,000 m3 = $345,000
Site B = $1.15/m3/km x 4.3 km x 50,000 m3 =$247,250
Total Costs
Site A Site B
Fixed + Variable $364,000 $300,410

 Solution

PROFIT = REVENUE TOTAL COST

REVENUE = $8.05 / m3 (50,000 m3)
= $402,500
PROFIT = $402,500 $300,410
= $102,090
Break-even Analysis

A breakeven analysis is used to determine how much

sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're
developing a pricing strategy, either as part of a marketing
plan or a business plan.
To conduct a breakeven analysis, use this formula:
Fixed Costs divided by (Revenue per unit - Variable
costs per unit)