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Engineering economy slides

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    economy Chapter2_by louy Al hami economy Chapter2_by louy Al hami Presentation Transcript

    • Chapter 2Cost Concepts And Design Economic Created By : Eng. Saad Hamasha & Eng.Maysaa Gharaybeh
    • Fixed, Variable and Incremental costs.
    • Fixed costs : Unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. Example :insurance and taxes on facilities, administrative salaries, license fees, and interest costs on borrowed capital.
    • Variable Costs :• It vary in total with the number of the output unite .• Example : costs of material and labor used in a product or service, because they vary in total with the number of output units even though costs per unit remain the same.
    • More ways to categorize costs• Direct: can be measured and allocated to a specific work activity (Materials, Labor)• Indirect: difficult to attribute or allocate to a specific output or work activity (overhead, maintenance)• Standard cost: cost per unit of output, Standard costs play an important role in cost control and other management functions.
    • • Cash cost: a cost that involves a payment of cash.• Book cost: a cost that does not involve a cash transaction but is reflected in the accounting system. ( equipments, machines, Depreciation)• Sunk cost: a cost that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. (money spend on a passport)
    • • Opportunity cost: the monetary advantage foregone due to limited resources. The cost of the best rejected opportunity. ( A student can work with 10,000$ Per year. or goes to the university for a year and spend 5,000$. Opportunity cost = 15,000$)• Life-cycle cost: the summation of all costs related to a product, structure, system, or service during its life span.
    • Example 2-1
    • Cost Factor Site A Site B •5,000 cubic yards ofDistance 6 miles 4.3 miles asphaltMonthly rental $1,000 $5,000 •4 months (17 weekscost 5- days a week)Cost (Set up $ $15,000 $25,000 •Compare theRemoving)Equipment 2 sites??!!!!!Hauling $1.15/yd3 – $1.15/yd3 – •NOTE:expenses mile mile •Rent , Set up/ Removal and FlagFlag person No need $96/day person are Fixed costs ($8,160) BUT
    • BUT Hauling is variable costSite A = 6*5000*$1.15 = $345,000Site B= 4.3*5,000*$1.15 = $247,250Then the total cost is
    • 2. Which is the better site? Site B3. How many cubic yards of asphalt does the contractor have todeliver before starting to make a profit if paid 8.05$ per cubic yard
    • The General Economic Environment
    • Consumer and Producer Goods and ServiceConsumer Goods and Service: are thoseproducts or service that are directly used bypeople to satisfy their wants.Producer Goods and Service: are used toproduce consumer goods or service or otherproducers goods.
    • Goods and service are produced and desired because theyhave utility.Utility: The power to satisfy human wants and needs.Utility is most commonly measured in terms of value.Value: the price that must be paid to obtain the particular item.Necessities and Luxuries needs.
    • Price And Demand Engineering focusing on increasing the utility (value) of materials by changing their form or location. P : the price that must be paid D: is the quantity that must be demanded or purchased
    • The general price-demand relationship
    • The demand for a product or service is directly related toits price according to p = a - bD for 0 ≤ D ≤ a/b , a > 0, b > 0where p is price, D is demand, and a and b are constantsthat depend on the particular product or service. a = price axis intercept -b = slope
    • CompetitionPerfect Competition: occurs in a situation in which anygiven product is supplied by a large number of venders andthere is no restriction on additional suppliers entering themarket (never occurs in actual practice).Perfect Monopoly: exist when a unique product or service isonly available from a single supplier and that vender canprevent the entry of all others into the markets. (rarely occurs in the practice)
    • Total Revenue FunctionTotal revenue is the product of the selling price per unit,p, and the number of units sold, D. TR = p × DFrom: p = a – bDWe find:
    • Maximize Revenue TR  a D  b D 2 d 2TR 2   2b  0 dDThe demand at maximum revenue: ˆ  a D 2b ˆ ˆ a2 a2 a2 Maximum TR  a D  b D 2    2b 4b 4b
    • Profit Profit = Total Revenue (TR) – Total Cost (CT) Total Cost (CT) = Fixed Cost (CF) + Variable Cost (CV) CT  C F  CVVariable Cost (CV) = Variable cost per unit (cv) × Demand (D) CV  cv  D Total Cost: CT  C F  cv D
    • Maximum profitScenario 1: Demand is a function of price ( p = a – bD)TR  a D  b D 2
    • Profit = Total Revenue (TR) – Total Cost (CT) and CT  CF  cv D and TR  a D  b D 2 Then Profit  (a D  b D 2 )  ( CF  cv D) Profit   b D 2  (a  cv ) D  CFTo find the maximum profit d ( profit )  a  cv  2 b D  0 dD d 2 ( profit ) 2   2b  0 dD a  cv Demand at Max profit: D * 2b
    • Breakeven points are found when Total Revenue = Total Cost. a D  b D 2  CF  cv D  b D 2  (a  cv ) D  CF  0 The demand at breakeven: D   2   a  cv   a  cv   4  b  C F  1 2  2b
    • Example: A company produces an electronic timing switch. The fixed cost (CF) is 73,000$ per month. The variable cost per unit (cv) is 83$. The selling price per unit (p = 180$ – 0.02D).A. Determine the optimal volume of product?B. Find the volume at breakeven occurs, what is the range of profitable demand?Solution:A. a = 180, b = 0.02 a  cv 180  83 D *   2,425 units per month 2b 2  0.02
    • B. Total Revenue = Total Cost. a D  b D 2  CF  cv D  b D 2  (a  cv ) D  CF  0D   2   a  cv   a  cv   4  b  C F  1 2  2b D    97  97   4  0.02 73000 2  1 2  20.02  97  59.74  D1   932 unit per month  0.04  97  59.74  D2   3,918 unit per month  0.04 Range = 932 to 3,918 unit per month
    • Scenario 2: Price and Demand are independent TR = P × D
    • Example:Variable cost per service hour = 62$.Selling price = 85.56$ per hour.Maximum Hours per year = 160,000 hours.Fixed cost = 2,024,000$ per year.A. What is the breakeven point in hours and in % of total capacity? Total revenue = Total cost (breakeven) p D  CF  cv D CF D   p  cv  2024000 D   85,908 hours per year 85.56  62 85,908 D   0.537  53.7% of capacity 160,000
    • B. What is the % reduction In breakeven point (sensitivity) if: 1. Fixed cost reduced by 10%? 0.92024000 D   77,138 hours per year 85.56  62 85,908  77,318 D reduction   0.1 10% 85,908 2. variable cost per hour reduced by 10%? 2024000 D   68,011 hours per year 85.56  0.9  62 85,908  68.011 D reduction   0.208  20.8% 85,908
    • 3. selling price increase by 10%? 2024000 D   63,021 hours per year 1.1 85.56  62 85,908  63,021 D reduction   0.266  26.6% 85,908Then the breakeven point is more sensitive to reduction invariable cost than fixed cost