Engineering-Economy-2b.pdf Engineering-Economy-2b.pdf

Engineering-Economy-2

1. Develop the
Alternatives

2. Fixed vs Variable
Develop the
Alternatives
Fixed Cost: costs that do not vary in
proportion to the quantity of output
Variable Cost: costs that vary in
proportion to the quantity of output
Rent (Office, House, Building)
Server Infrastructure Materials
Labor, Worker, Manpower

3. Direct vs Indirect
Develop the
Alternatives
Direct Cost: costs that can be
reasonably measured and allocated
to a specific output or work activity
Indirect Cost: costs that are difficult
to allocate to a specific output or
work activity (may be referred to as
overhead cost)
Materials Electricity

4. Cash vs Book
Cash Cost: cost that involves cash
payment
Book Cost: costs that do not
involve cash payments
Depreciation: the mere use of
vehicles, buildings, equipment
Cash Transaction / Exchange

5. Opportunity Cost
→ the cost of foregoing the opportunity to earn
interest or a return on investment funds
Consider a student who could earn $20,000 for working during a
year, but chooses instead to go to school for a year and spend
$5,000 to do so.
Calculate Opportunity Cost for this case.

6. Opportunity Cost
→ the cost of foregoing the opportunity to earn
interest or a return on investment funds
Consider a student who could earn $20,000 for working during a
year, but chooses instead to go to school for a year and spend
$5,000 to do so.
The opportunity cost of going to school for that year is :
$25,000 = $5,000 cash outlay + $20,000 for income foregone

7. Investment Cost
Major Equipment Excavators

8. Land Acquisition Cost
total cost that a company recognizes on its books for property purchase

9. Personnel Cost

10. Materials Cost

11. Operation & Maintenance Cost
recurring annual expense items associated with the operation phase of
the life cycle
five primary resource areas—people, machines, materials, energy, and information

12. Repair Cost

13. Replacement Cost
the new purchase after completion of individual service life

14. Disposal Cost
may include labor and material costs for removal of the item,
shipping cost, or special cost (cost of disposing hazardous materials)

15. Develop the
Alternatives

16. Develop the
Alternatives
Realistic Financial Model

17. Life Cycle Cost

18. Introduction, Growth
Introduction Phase
▪Fine tuning may warrant
unusual expenses for
▪Research
▪Product development
▪Process modification and
enhancement
▪Supplier development
Growth Phase
▪Product design begins to
stabilize
▪Effective forecasting of
capacity becomes necessary
▪Adding or enhancing capacity
may be necessary

19. Maturity, Decline
Maturity Phase
▪Competitors now established
▪High volume, innovative
production may be needed
▪Improved cost control,
reduction in options, paring
down of product line
Decline Phase
▪Unless product makes a
special contribution to the
organization, management
must plan to terminate
offering

20. Life Cycle Cost
http://link.springer.com/10.1007/978-3-030-11352-0_391

21. Life Cycle Cost
https://www.researchgate.net/figure/NOTIONAL-LIFE-CYCLE-COSTS-FOR-A-DOD-WEAPON-SYSTEM_fig1_264083243

22. Life Cycle Cost
https://www.researchgate.net/figure/NOTIONAL-LIFE-CYCLE-COSTS-FOR-A-DOD-WEAPON-SYSTEM_fig1_264083243
1. engineering design and development costs
2. fabrication and testing costs
3. operating and maintenance costs
4. disposal costs

23. Life Cycle Costing
Develop the
Alternatives
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/target-lifestyle.html
Phase Cost Examples
Planning and DesignResearch, Development, Design
Construction Material, Labor, Overhead, Machine Setup, Inventory,
Training, Maintenance and Depreciation
Operations Distribution, Advertising, Warranty Claims
End-of-Life Environmental Cleanup, Disposal

24. Target Costing vs Life Cycle Costing
Develop the
Alternatives
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/target-lifestyle.html
A company is planning a new product. Market research information
suggests that the product should sell 10,000 units at $21.00/unit.
The company seeks to make a mark-up of 40% product cost. It is
estimated that the lifetime costs of the product will be as follows:
1.Design and development costs $50,000
2.Manufacturing costs $10/unit
3.End of life costs $20,000

25. Target Costing vs Life Cycle Costing
Develop the
Alternatives
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/target-lifestyle.html
The company estimates that if it were to spend an additional
$15,000 on design, manufacturing costs/unit could be reduced.
(a) What is the target cost of the product?
(b) What is the original lifecycle cost per unit and is the product
worth making on that basis?
(c) If the additional amount were spent on design, what is the
maximum manufacturing cost per unit that could be tolerated if the
company is to earn its required mark-up?

26. Assignment
Develop the
Alternatives
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/target-lifestyle.html
Explain the concept of sunk cost
in 8-15 sentences
▪Individual
▪A4-sized bond paper
▪Encoded, not handwritten