Transcript Document

COST CONCEPTS AND DESIGN ECONOMICS
HW2: 2, 4, 8, 10, and 37 due Sunday 3/10/2010
Quiz #1 is on Sunday 3/10/2010
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Value: the worth that a person attaches to an
object or service.
Utility: the power to satisfy human wants. The
utility that an object has for a person is the
satisfaction he derives from it.
Utility and value of an object are inherent not in the
object itself but in the regard that a person has for
it.
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Value is an appraisal of utility in terms of a
medium of exchange.
The evaluation of the utility of various items may
be expected to vary with time
The possibility for exchange exists when each of
two persons has utilities desired by the other.
Utilities must be created by changing the
physical environment
The purpose of much engineering effort is to
determine how physical factors may be altered
to create the most utility for the least cost in
terms of the utilities that must be given up.
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Consumer goods: products & services that
directly satisfy human wants.
Producer goods: satisfy human wants
indirectly as a part of the production or the
construction process.
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This type of utility includes utility of goods and
services that they intend to consume personally for
the satisfaction they get out of them.
The utility a person attaches to goods and services
that are consumed directly is in large measure a result
of subjective, non-logical process.
Some kinds of human wants are much more
predictable than others.
It seems logical to make sales presentations on the
basis of what consumers ascribe utility.
The utility of producer goods as a means to an end
may be in large measure considered objectively.
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Economy of exchange occurs when utilities are
exchanged by two or more people.
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Exchanges are made when they are thought to
result in mutual benefit.
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This is possible because the objects of
exchange are not valued equally by parties to
the exchange.
Economy of exchange is possible because
consumer utilities are evaluated by the
consumer almost entirely by subjective
considerations
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A merchant (MT) buys computers from a (mfg).
mfg can produce & distribute computers at a total cost of $100 /
unit.
MT buy a number of computers at a price of $200 each.
MT expends an average of $50 / unit in selling effort.
MT can sell computers to end consumers at $400 each.
The reason that mfg profits is that his environment is such that he
can sell to MT for $200 a number of computers that he can’t sell
elsewhere at a higher price and that he can mfg computers for $100
each.
The reason that MT profits is that his environment is such that he
can sell computers at $400 by applying $50 of selling effort upon a
computer that he can buy for $200 from mfg in question but not for
less elsewhere.
Why doesn’t mfg enter MT field and thus increase his profit?
Why doesn’t MT enter mfg field?
Answer: neither mfg nor MT can do so unless each changes his
environment.
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Exchange consists essentially of physical activity designed to transfer
control of things from one person to another. Thus increasing utility by
altering the physical environment.
Each party in an exchange should seek to give some thing that has little
utility for him but that will have great utility for the receiver.
The aim of much sales and other research is to find products that not
only will have great utility for the buyer but that can be supplied at a low
cost, that is have low utility for the seller.
range of mutual benefit in exchange: difference between utility that a
specific good or service has for the buyer and utility it has for the seller
represents the profit that is available for division between buyer and
seller.
A person seeking to sell may be expected to make two evaluations:
1.
2.
min amount he will accept
max amount a prospective buyer can be convinced to pay by persuasion.
In bargaining it’s usually advantageous to obscure one’s situation.
Sellers will ordinarily refrain from revealing costs of things they are
seeking to sell or from referring a buyer to a competitor who is willing
to sell at a lower price.
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A salesperson’s function is to call attention to things he has to sell
Mfg can increase stability of their products by building into them
greater customer appeal in terms of:
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Qualities that make a product more desirable may have two
beneficial effects:
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greater usefulness
greater durability
greater beauty
introduce their products to market with greater persuasive effort in the form of
advertising and sales promotion.
Increase the price asked for the product.
Volume of product sold may increase to the extent that a lower mfg cost
per unit may result.
The purpose of engineering economy analysis is to estimate, on a
factual bases as possible, what the possible consequences of a
decision will be.
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1st cost: cost elements that don’t recur after an activity
is initiated. it involves cost of getting an activity
started.
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For purchased equipment, these include:
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For a fabricated structure, system, or an item of
equipment, they include:
1. Purchase price plus shipping cost
2. installation and training costs
1. engineering design & development cost
2. test & evaluation cost, and construction or production cost
3. shipping, installation, and training costs.
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OC will be experienced continually over the
useful life of the project.
OC include costs for:
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3.
4.
5.
operating & maintenance personal
fuel and power costs
operating and maintenance supply costs
spare and repair part costs
costs for insurance and taxes, overhead.
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Fixed cost (FC): group of costs involved in a going activity whose
total will remain relatively constant throughout range of operational
activity.
FCs are independent of volume of output.
FC include:
1.
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3.
4.
5.
depreciation, maintenance, lease rentals
insurance and taxes and facilities
interest on invested capital, sales programs
general management and administrative salaries, and research.
license fees, and interest costs on borrowed capital.
VC: group of costs which vary in some relationship to the level of
operational activity.
VC includes: direct labor, direct material, direct power, and the like,
which can readily be allocated to each unit of product.
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incremental cost: additional cost that results from
increasing output of a system by one (or more) units.
ICs can be overestimated or underestimated.
Overestimation may hide a profit possibility.
Underestimation may lead to the undertaking of an
activity that will result in a loss.
EXAMPLE
– IC of driving a car might be $0.27 / mile. This cost depends on:
• mileage driven
• age of car
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Marginal cost (MC): an increment of output whose cost is
barely covered by the monetary return derived from it.
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Disregard cost incurred in the past Because
only future consequences of investment
alternatives can be affected by current
decisions
A sunk cost: 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: cost of best rejected
opportunity and is hidden or implied;
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1.
Acquisition
◦ Needs Assessment
◦ Conceptual design
◦ Detailed Design
2. Operation
◦ Production/Construction
◦ Operation/Customer Use
◦ Retirement/Disposal
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Life-cycle cost: sum of all costs, both recurring & nonrecurring,
related to a product, structure, system, or service during its life
span.
Life cycle begins with the identification of economic need or want
and ends with retirement and disposal activities
During acquisition phase, nonrecurring costs are incurred and these
constitute 1st cost of the structure or system.
During utilization, recurring costs are experienced.
Life cycle analysis considers all costs over the life cycle and seeks
economic balance between costs of acquisition & cost of operation.
Many beneficial design decisions can be made during acquisition
phase of the life cycle that will min the cost of operating and
maintaining the product during use.
Life cycle cost and economic analysis is an approach which should
originate early in the product life cycle, during conceptual and
preliminary design.
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Interest: rental amount charged by financial institutions for use of
money.
The concept of interest can be applied to earning assets, which
borrow from their owner, repaying through the earnings generated.
This economic gain through the use of money is what gives money
its time value.
Because engineering projects require investment of money, it is
important that the time value of the money used be reflected in the
evaluation of these projects.
Interest rate or rate of capital growth is the rate of gain received
from an investment.
Interest rate is determined by market forces involving supply &
demand
In one aspect, interest is an amount of money received as a result of
investing funds, either by lending it or by using it in the purchase of
materials, labor, or facilities. (profit)
In another aspect, interest is amount of money paid out as a result of
borrowing funds (cost).
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Alternatives regarding the use of money:
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6.
Exchange money for goods and services that will satisfy his
personal wants.
Exchange money for productive goods or instruments
keep the money
Lend money, without interest, to be returned at some future
date.
Lend money: the borrower will repay the initial sum +
interest at some future date.
Expecting an inflation rate in excess of interest rate may be
tempted to choose alternatives 1 or 2 above, knowing that
such choices will cost more later.
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Number of factors to consider on the interest rate:
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What is the probability that the borrower will not repay the loan? If
the chances are 3% that the loan will not be repaid, the lender is
justified in charging 3% of the sum to compensate for the risk of
loss.
What expense will be incurred in investigating the borrower,
drawing up the loan agreement, transferring funds to borrower, and
collecting the loan?
What net amount will compensate for being not considering other
alternatives for disposing of the money?
If rates of inflation are expected to be higher during the term of the
loan, a higher rate would be appropriate.
Therefore, interest rate may be thought of being made up of
percentages for:
1.
2.
3.
Risk of lose.
Admin expenses.
Pure gain or profit after adjustment for the effect of inflation.
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If a person borrows funds for personal use, interest
rate paid will be a measure of the amount the
person is willing to pay for the privilege of having
satisfaction immediately instead of in the future.
If funds are borrowed to finance operations
expected to result in a gain, the interest to be paid
must be less than the expected gain.
If inflation is present, the borrower will consider its
effects on the current interest rate.
In times of inflationary increases, it generally pays
to be a borrower, especially if the inflation rate
exceeds the interest rate.
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Since money has an earning power, this opportunity will
earn a return, so that after n years the original dollar +
its interest will be a larger amount than the $1 received
at that time.
The fact that money has a time value means that equal
dollar amounts at different points in time have different
value as long as the interest rate that can be earned
exceeds zero.
Money has a time value because the purchasing power of
a dollar changes through time.
When considering time value of money it’s important to
recognize both the earning power of money and the
purchasing power of money.
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Cash cost a cost that involves payment in cash and
results in cash flow
Book cost a payment that does not involve cash
transaction; book costs represent the recovery of
past expenditures over a fixed period of time
Depreciation the most common example of book
cost; depreciation is what is charged for the use of
assets, such as plant and equipment; depreciation
is not a cash flow
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Utility: a measure of the value which
consumers of a product or service
place on that product or service
Demand: a reflection of this measure
of value, and is represented by price
per quantity of output
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PRICE
QUANTITY ( OUTPUT )
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PRICE
a
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
QUANTITY ( OUTPUT )
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PRICE
a
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
b = slope of the demand function;
QUANTITY ( OUTPUT )
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PRICE
a
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
b = slope of the demand function;
D = (a – p) / b
QUANTITY ( OUTPUT )
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PRICE
a
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
b = slope of the demand function;
D = (a – p) / b
PRICE
QUANTITY ( OUTPUT )
Total Revenue = p x D
= (a – bD) x D
QUANTITY ( OUTPUT )
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PRICE
a
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
b = slope of the demand function;
D = (a – p) / b
PRICE
QUANTITY ( OUTPUT )
Total Revenue = p x D
= (a – bD) x D
=aD – bD2
QUANTITY ( OUTPUT )
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PRICE
a
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
b = slope of the demand function;
PRICE
D = (a – p) / b
QUANTITY ( OUTPUT )
MR = dTR / dD = a –2bD = 0
Total Revenue = p x D
= (a – bD) x D
=aD – bD2
QUANTITY ( OUTPUT )
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PRICE
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
a
b = slope of the demand function;
PRICE
MR=0
D = (a – p) / b
QUANTITY ( OUTPUT )
dTR / dD = a –2bD = 0
Total Revenue = p x D
= (a – bD) x D
=aD – bD2
QUANTITY ( OUTPUT )
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PRICE
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
a
b = slope of the demand function;
PRICE
MR=0
TR = Max
D = (a – p) / b
QUANTITY ( OUTPUT )
MR = dTR / dD = a –2bD = 0
Total Revenue = p x D
= (a – bD) x D
=aD – bD2
QUANTITY ( OUTPUT )
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PRICE
Price equals some
constant value minus some multiple
of the quantity demanded:
p=a-bD
a = Y-axis (quantity) intercept,
(price at 0 amount demanded);
a
b = slope of the demand function;
PRICE
MR=0
TR = Max
D = (a – p) / b
QUANTITY ( OUTPUT )
MR = dTR / dD = a –2bD = 0
Total Revenue = p x D
= (a – bD) x D
=aD – bD2
QUANTITY ( OUTPUT )
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Cost / Revenue
Marginal
( Incremental) Cost
Profit is maximum where
Total Revenue exceeds
Total Cost by greatest amount
Maximum
Profit
Cost / Revenue
Quantity ( Output )
Marginal
Demand
Revenue
Ct
Profit
Total Revenue
Cf
D’1
D*
D’2
D’1 and D’2 are breakeven points
Quantity ( Output )
Demand
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Occurs where total revenue exceeds total
cost by greatest amount
Occurs where marginal cost = marginal
revenue;
Occurs where dTR/dD = d Ct /dD;
D* = [ a - b (Cv) ] / 2
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Occurs where TR = Ct
( aD - D2 ) / b = Cf + (Cv ) D
- D2 / b + [ (a / b) - Cv ] D - Cf
Using the quadratic formula: D’ =
- [(a
/ b ) - Cv ] + { [ (a / b ) - Cv ] 2 - ( 4 / b ) ( - Cf ) }1/2
----------------------------------------------------------------------2/b
Solve Ex.2-6
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Must maintain a life-cycle design perspective
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Ensures engineers consider:
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Initial investment costs
Operation and maintenance expenses
Other annual expenses in later years
Environmental and social consequences over design life
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This green-engineering approach
has the following goals:
1. Prevention of waste
2. Improved materials selection
3. Re-use and recycling of resources
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2.
Determine optimal value for certain
alternative’s design variable
Select best alternative, each with
its own unique value for the design
variable
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2.
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Fixed cost(s)
Cost(s) that vary directly with the design variable
Cost(s) that vary indirectly with the design variable
Simplified Format of Cost Model With One Design Variable
Cost = aX + (b / X) + k
a is a parameter that represents directly varying cost(s)
b is a parameter that represents indirectly varying cost(s)
k is a parameter that represents the faced cost(s)
X represents the design variable in question
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1.
2.
Identify primary cost-driving design variable
Write an expression for the cost model in terms of the
design variable
3. Set 1st derivative of cost model wrt design variable
equal to 0
4. Solve equation in step 3 for optimum value of design
variables
5. Use 2nd derivative of the cost model with respect to the
design variable to determine whether optimum
corresponds to global max or min.
Solve Ex.2-8
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When alternatives for accomplishing a task are
compared for one year or less (influence of time
on money is irrelevant)
Rules for Selecting Preferred Alternative
1. When revenues & other economic benefits are
present and vary among alternatives, choose
alternative that maximizes overall profitability
based on the number of defect-free units of output
2. When revenues and economic benefits are not
present or are constant among alternatives,
consider only costs and select alternative that
minimizes total cost per defect-free output
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Total Cost in Material Selection
In many cases, selection of among materials
cannot be based solely on costs of materials.
Frequently, change in materials affect design,
processing, and shipping costs.
Alternative Machine Speeds
Machines can frequently be operated at
different speeds, resulting in different rates of
product output. However, this usually results in
different frequencies of machine downtime.
Such situations lead to present economy studies
to determine preferred operating speed.
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Make Versus Purchase (Outsourcing) Studies
A company may choose to produce an item in house, rather
than purchase from a supplier at a price lower than
production costs if:
1.
direct, indirect or overhead costs are incurred
regardless of whether item is purchased from an
outside supplier
2.
The incremental cost of producing the item in the short
run is less than the supplier’s price
The relevant short-run costs of make vs. purchase
decisions are the incremental costs incurred
and the opportunity costs of resources
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Make Versus Purchase (Outsourcing) Studies
Opportunity costs may become significant when
in-house manufacture of an item causes other
production opportunities to be foregone (E.G.,
insufficient capacity)
In the long run, capital investments in additional
manufacturing plant and capacity are often feasible
alternatives to outsourcing.
Examples: 2-10, 2-12, 2-15
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