Cost concept and design economics .pptx

Complete cost concept in economics and how the problem designs and their solution.

1. Cost Concepts and Design Economics

2. Cost Terminology

3. Fixed costs are the costs that are not affected by the level of activity over a feasible range of operation. Examples for fixed costs are taxation, insurance and interest Variable costs are the costs that vary with the operation and level of activity. Examples for variable costs are; Labour, Energy, and maintenance Fixed, Variable & Incremental Cost

4. Incremental Cost is the additional cost that results from increasing the output of the system.. Reference is usually made to an increase of cost in relation to some other factor, thus resulting in such expressions as incremental cost pr ton, incremental cost per gallon, or incremental cost pr unit of production Fixed, Variable & Incremental Cost

5. Direct costs can be reasonably measured and allocated to a specific output or work activity -- labor and material costs directly allocated with a product, service or construction activity. For example, the material needed to make a chair would be a direct cost. Direct, Indirect & Standard Costs

6. Indirect costs are difficult to allocate to a specific output or activity. i -e costs of common tools, general supplies, and equipment maintenance Overhead cost consists of plant operating costs that are not direct labor or material costs. Examples of overhead include electricity, general repairs, property taxes, and supervision. indirect costs, overhead and burden are usually used interchangeably. Direct, Indirect & Standard Costs

7. Standard Costs are planned costs per unit of output that are established in advance of actual production. Developed from?? Labor hours, materials etc…. Direct, Indirect & Standard Costs

8. Cash costs are costs that involve cash payments and results in cash flow. They are the estimated costs and future expenses for the alternatives being analyzed. Book costs are costs that do not involve cash payments but it represent the recovery of past expenditures over a fixed period of time. Cash Cost versus Book Cost

9. A sunk cost is one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. An opportunity cost is the cost of the best rejected ( i.e., foregone ) opportunity .forgone because of limited resources; Sunk Costs & Opportunity Cost

10. Life-cycle cost is the summation of all costs, both recurring and nonrecurring, related to a product, structure, system, or service during its life span. Life cycle begins with the identification of the economic need or want ( the requirement ) and ends with the retirement and disposal activities. LCC are a summation of all the costs (and some revenues) over the entire life span of a structure, or system. LIFE-CYCLE COST

11. Recurring costs Recurring costs are costs that are repeated when an organization produces similar goods or services on a continuing basis. Examples of recurring costs are variable costs, because they repeat with each unit of output Nonrecurring costs Nonrecurring costs are those costs which are not repetitive with the production of a merchandise or service.   Examples of recurring costs are purchase cost for real estate upon which a plant will be built and construction costs. LIFE-CYCLE COST

12. The General Economic Environment

13. Consumer goods and services are those products or services that are directly used by people to satisfy their wants. Food, clothing, homes, cars, television sets, haircuts, opera, and medical services are examples. Producer goods and services are used to produce consumer goods and services or other producer goods. Machine tools, factory buildings are examples. Consumer and Producer Goods and Services

14. Goods and services are produced and desired because they have utility —the power to satisfy human wants and needs. Utility is most commonly measured in terms of value(price that must be paid to obtain the particular item) Measures of Economic Worth

15. Goods and services may be divided into two types: necessities luxuries These terms are relative, because, for most goods and services, what one person considers a necessity may be considered a luxury by another. Necessities, Luxuries, and Price Demand

16. Necessities, Luxuries, and Price Demand

17. Necessities, Luxuries, and Price Demand The relationship between price and demand can be expressed as the linear function where a is the intercept on the price axis and −b is the slope.

18. Most general economic principles are stated for situations in which perfect competition exists. Perfect competition occurs in a situation in which any given product is supplied by a large number of vendors and there is no restriction on additional suppliers entering the market. Competition

19. Monopoly is at the opposite pole from perfect competition. A Perfect monopoly exists when a unique product or service is only available from a single supplier and that vendor can prevent the entry of all others into the market. Competition

20. Maximum total revenue can be obtained by, The Total Revenue Function

21. The Total Revenue Function

22. Fixed costs remain constant over a wide range of activities, but variable costs vary in total with the volume of output Cost, Volume, and Breakeven Point Relationships

23. Cost, Volume, and Breakeven Point Relationships

24. Cost, Volume, and Breakeven Point Relationships

25. Cost, Volume, and Breakeven Point Relationships

26. An economic breakeven point for an operation occurs when total revenue equals total cost. Breakeven Point

27. A company produces circuit boards used to update outdated computer equipment. The fixed costs $42,000 per month, and the variable cost is $53 per circuit board. The selling price per unit is p=$150−0.02D. Maximum output of the plant is 4,000 units per month. a. Determine optimum demand for this product. b. What is the maximum profit per month? c. At what volumes does breakeven occur? d. What is the company’s range of profitable demand? Question 2.12

28. An electric power plant uses solid waste for fuel in the production of electricity. The cost Y in dollars per hour to produce electricity is Y = 12 + 0.3 X +0.27X^2. Revenue in dollars per hour from the sale of electricity is15 X − 0.2X^2.Find the value of  X that gives maximum profit . Question