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
𝐅𝐅𝐅𝐅 100,000
𝑸𝑸𝑩𝑩𝑩𝑩 = = =
(𝐏𝐏−𝐕𝐕) (𝟒𝟒𝟒𝟒 −𝟐𝟐𝟐𝟐)
A company is investigating to buy a new production machinery as
part of its operations. Three alternatives have been identified:
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)
Engineering Economy by William G.
Sullivan, Elin M. Wicks, C. Patrick Koelling
(17th ed. 2018).pdf
Example 2-8 page 68
Example 2-9 page 69
Example 2-10 page 70
Example 2-12 page 73
Two following machines are under consideration for production
of a new part:
Which machine should be selected?
(Hint: solve for profit per day)
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 per 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 = ???
(continue)
Solution
Speed A
Cycle Time = Idle time + Productive time
Cycle time = 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
(continue)
Solution
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 =
• A painting operation is 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?
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 16496 units (4874 per year) units
must be painted to justify purchase of a robot.
