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Introduction to Engineering Economics Unit I MG6863

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Engineering Economics
Final Year Mechanical Engineering

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Introduction to Engineering Economics Unit I MG6863

  1. 1. Introduction to Engineering Economics • Engineering – It is an activity in which materials are acted upon by forces of nature for getting something beneficial for mankind Resources By different Steps End product Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  2. 2. Engineering Economics • Engineering deals with materials & forces of nature with economical use for the benefit of mankind. • Need – Resource & Energy crisis – Stiff Competition in the market Success company knows – what the customer wants? – How can economize the product? Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  3. 3. Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  4. 4. Working Environment - Engineer Physical Environment (Engineers concern) ENGINEERING Production / Construction Economic Environment (Sales & Administrative) Total Environment Assessing the worth of these products/services in economic terms Produce products and services based on physical laws (e.g. Newton’s Law) Earlier days = Physical Economic Nowadays = Economic PhysicalBalamurugan.S Assistant Professor AAA College of Engg. & Tech
  5. 5. Utility vs Value • Changes with time • By altering the physical environment, utility increases • Vary from person to person Customer – Price paid for the item Designer – equates the value with reliability Production person – what it costs to manufacture Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  6. 6. Flow in an Economy Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  7. 7. Law of Supply and Demand • Price decreases = Demand increases, Supply Decreases • Equilibrium point, Quantity of Supply = Quantity of Demand Factors influencing Demand 1. Income of the people 2. Prices of related goods (TV , VCD) 3. Taste of customers (Diabetes , Sugar free products) Factors influencing Supply 1. Cost of the inputs (Agriculture, less area / Fertilizer & Labour cost) 2. Technology ( New machine , Long run) 3. Weather ( Sweater) 4. Prices of related goods (TV , VCD)Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  8. 8. Concept of Engineering Economics • Price plays a major role in deciding the demand & supply • Organization point of view, – Efficient & effective functioning of the organization would help it to provide goods/services at a lower cost. (Fix lower cost for its goods) Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  9. 9. Efficiency • Technical Efficiency (%) = 𝑂𝑢𝑡𝑝𝑢𝑡 𝐼𝑛𝑝𝑢𝑡 × 100 If it is a Diesel Engine, • Technical Efficiency (%) = 𝐻𝑒𝑎𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑜𝑓 𝑚𝑒𝑐𝑕𝑎𝑛𝑖𝑐𝑎𝑙 𝑒𝑛𝑒𝑟𝑔𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝐻𝑒𝑎𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑜𝑓 𝑓𝑢𝑒𝑙 𝑢𝑠𝑒𝑑 × 100 • Can never be more than 100 % • Economic Efficiency (%) = 𝑊𝑜𝑟𝑡𝑕 𝐶𝑜𝑠𝑡 × 100 • Worth – Annual revenue generated • Cost – Total annual expenses • Survival & Growth of any business, it should be more than 100% Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  10. 10. Economic Efficiency • Economic Efficiency = Productivity Ways to improve productivity 1. Increased output for the same input (Steel plant, Altering Layout, Location of Billet Making Section, Closer to furnace, Scale formation in top of the ladle reduced) 2. Decreased input for the same output (Substitute Raw Material at Low cost, Purchase Department) 3. Less proportionate increase in output is more than of the input (Surplus facility, New product from same facility, Increase in revenue in addition to existing product > Increase in Material Cost). Net Productivity ratio Increases. 4. When proportionate decrease in input is more than that of output (New Uneconomical product from same Facility, Decrease in revenue < decrease in material, operation, maintenance cost) Net Productivity ratio Increases. 5. Simultaneous increase in output and decrease in input (Automation Robot, initial cost high, drastic reduction in operation cost, long run, increase in revenue, decrease in input, No fatigue) Net Productivity ratio Increases at Faster rate. Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  11. 11. Variable cost varies with the volume of production, over head is fixed. Variable cost = Direct material, labour, expenses. Overhead cost = Aggregate of indirect material, labour, expenses. Administration overhead = costs for administering the business Sales overhead = Promotional Activities, Distribution overhead = cost for shipping from factory to customer Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  12. 12. Selling Price of a Product 1. Direct Material + Direct Labour + Direct Expenses = Prime cost 2. Prime cost + Factory overhead = Factory cost 3. Factory cost + Administrative overhead = Cost of production 4. Cost of production + Opening finished stock – Closing finished stock = Cost of goods sold 5. Cost of goods sold + Selling & distribution overhead = Cost of sales 6. Cost of sales + Profit = Sales 7. Sales / Quantity of sold = Selling price per unit • If Opening finished stock = Closing finished stock, then Cost of production = Cost of goods sold Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  13. 13. Other costs • Marginal cost ( Volume (V) & Cost (X) – Benefit of mass production – Cost of production 20 units(V1) = Rs.10,000 (X1) – Cost of production 21 units(V2) = Rs.10,045(X2) – Marginal cost of producing the 21st unit is Rs.45 (X2-X1) Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  14. 14. Other costs • Marginal Revenue – Additional Revenue – Revenue of selling 20 units = Rs.15,000 – Revenue of selling 21 units = Rs.15,085 – Marginal revenue of selling 21st unit is Rs.85 Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  15. 15. • Average Cost Avg.Cost / unit = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑖𝑛𝑔 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑉𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 Sunk Cost it is the past cost of an equipment / asset. Assume a Machine purchased for 1,00,000rs about 3 years back, now the present value is not 1,00,000rs. Present value of the equipment should be taken for the analysis. Other costs Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  16. 16. Other costs • Opportunity Cost – Shares & Real estate – Example, Invested sum of Rs.50,000 – If share means, the annual return Rs.4,500 – If real estate means, return of 10% expected, annual return Rs.5,000. – Return in share < Return in Real Estate Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  17. 17. Other costs • Life cycle cost Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  18. 18. Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  19. 19. Elementary Economic Analysis • Decision making done by Simple Economic Analysis Concept of Simple Economic Analysis 1. Material Selection for a product 2. Design selection for a product 3. Design selection for a process industry 4. Building material selection for construction activities 5. Process Planning / Process Modification Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  20. 20. Concept of Simple Economic Analysis Material Selection for a product • Substitution of Raw material – Reduce the cost of the product – Cheaper raw material price – Reduced machining /process time – Enhanced durability of the product Example Problem – Economics book Pg.No-25 Jet engine Part, Aluminum vs Steel Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  21. 21. Concept of Simple Economic Analysis • Design selection for a product – Design is an important factor which decides the cost of the product for a specified level of performance of that product. – Proper design selection leads to (i) Reduced raw material requirements (ii) Increased Machinability (iii) Reduced Labour – Example Economics book Pg.No-28 – Tapered Fastening Pin – Two Designs A & B, select the economic design Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  22. 22. Concept of Simple Economic Analysis • Design selection for a process industry – Reduce the cost by choosing the best design from the alternatives – Example Economics book Pg.No-29 – Refinery Operations, Process Vessel Design Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  23. 23. Concept of Simple Economic Analysis • Building material selection for construction activities – Price of the raw material is location dependent. – If the location is Remote area, then Transportation cost is more. – Example Economics book Pg.No-30 – Window Frame – Aluminium Window Frame vs Steel Window Frame Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  24. 24. Concept of Simple Economic Analysis • Process Planning / Process Modification – Process sequence of a component is not static. – Modification of sequence to minimize the cost pf manufacturing – Objective – To identify the most economical sequence of operations. Example - Economics book Pg.No-31 Identify the best process sequence Balamurugan.S Assistant Professor AAA College of Engg. & Tech
  25. 25. Steps in Process Planning 1. Analyze the part drawing to get an overall picture of what is required. 2. Make recommendations to or consult with product engineers on product design changes 3. List the basic operations required to produce the part to the drawing or specifications 4. Determine the most practical and economical manufacturing method and the form or tooling required for each operation 5. Devise the best way to combine the operations and put them in sequence 6. Specify the gauging required for the process Balamurugan.S Assistant Professor AAA College of Engg. & Tech

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