Transcript Economic AnalysisPresentation-2006Sept

The George Washington University
School of Engineering & Applied Science
Department of Electrical & Computer Engineering
Engineering Economic Analysis
Cost Estimation
ECE-157 - Fall 2006
Prof. T. J. Manuccia
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Economic Analysis
• The economic analysis of an engineering project can be
performed in numerous ways.
• For ECE 156-7-8, we want you to estimate:
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Cost to develop one or more prototypes
Cost for the production of a specified number of units
Packaging costs
Distribution costs
Estimated wholesale price (per unit only)
Estimated retail price (per unit only)
• The first four costs above can be expressed as either:
• Total, i.e., the total cost for all units produced
• Per unit, i.e., total divided by the number of units produced.
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Labor Costs Impact All Phases of Product
Development
• Technical personnel are needed for the development of the
prototype.
• They fall in different labor categories with different salaries:
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Project Manager :
Design Engineer :
Hardware Engineer :
Software Engineer :
Test Engineer :
Technical Writer :
$66/hr
$57/hr
$48/hr
$40/hr
$36/hr
$30/hr
( $132k /yr)
( $114k /yr)
( $ 96k /yr)
( $ 80k /yr)
( $ 72k /yr)
( $ 60k /yr)
• For simplicity in this classroom setting, we will explicitly
consider ONLY the above labor categories in development of
the prototype.
• You will assume each of the above rolls as you work on your own
project.
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Salaries & Other Direct Costs Need To Be “Loaded” To Be
Converted to “Cost to the Contract” (p.1)
• Indirect costs:
• Fringe benefits – Services or benefits provided to employees
– Health Insurance, Payroll Taxes, Pension Contribution, Paid Absences, etc
• Overhead – Costs associated with the performance of a project
– Facility Costs (rent, heat, electricity, etc.)
– General Laboratory Supplies, etc.
• G&A - Costs associated with the overall management / administration
of an organization
– Office supplies and equipment
» PC’s, Xexoxes, Fax machines, paper, etc.
– Staff not directly charging to projects
» Secretaries, top management & marketing personnel, etc.
• Fee (i.e., built-in profit margin)
• Cost of money (i.e., if money is borrowed to solve short term cash flow
problems at the start of a project).
• Estimated annual inflation on multi-year projects
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Salaries & Other Direct Costs Need To Be “Loaded” To Be
Converted to “Cost to the Contract” (p.2)
• For the purpose of this class we will approximate the
actual conversion from salary to contract charges by a
single multiplier factor of 2.8.
• Example: An employee with a $100/hr salary would charge
the contract $280/hr
• “The multiplier” ranges from ~2.0 to 3.3 in industry with
higher numbers typically found in high tech or top-heavy
consulting firms, lower numbers in production facilities.
• “The multiplier” is considerably lower in academia, but one
must be careful since the details of how different direct costs
are loaded can be different from the commercial sector.
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Prototype Cost
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Calculate time and salary for each of the various labor categories
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Create totals for hours and for total salary
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Parts total = $1000
Machine shop, PCB fabrication and population = $2000
Total = $3000
Add to this a 5% pass-through fee
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Labor charged to contract = $13,720
Add the cost of all parts and external services needed to produce the final, pre-manufacturing
prototype
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Total hours = 130
Total salary = $4900
Multiple your salary total by 2.8 to calculate how much these individuals will cost the contract
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3 Technical writers at $30/hour times 10 hours = $900
1 SW engineer at $40/hr times 100 hours = $4000
5% of $3000 = $150
Add all of the above to calculate your prototype cost
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Cost of labor = $13,720
Cost of parts & external services = $3,150
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Prototype cost = $16,870
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IMPORTANT: In your deliverables & homework, present the your data and
analogous computations in tabular form and show subtotals.
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Note that the cost computation method outlined above is slightly different from that used in 6
previous years.
Production Costs - Labor (p.1)
• Note the different labor categories, salaries, and “multiplier” in
a production environment versus in an engineering /
development operation.
• Manufacturing Process Development and Verification:
Estimate total time, then multiple by a salary of $20/hr
– Example: 100 hours mfg verification X $20/hr = $2000
• Software Testing:
Estimate total time, then multiply by a salary of $15/hr
– Example: 300 hours SW verification X $15/hr = $4500
• Use a multiplier of 2.0 for the above labor categories.
– Example: Production labor cost = $6500 X 2.0 = $13,000
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Production Costs – Non-labor (p.2 - continued)
• Add the cost of parts in an appropriate quantity (eg, 1,000 units)
for full scale production.
– Example: Parts = $10/unit x 1,000 units = $10,000
– Note: Parts ordered in large quantities will be less expensive.
• Estimate the costs of (a) printing the necessary documentation
and (b) packaging for distribution.
– Example: Printing & Packaging = $1/unit x 1000 units = $1000
– Note: $1/unit is intentionally wrong – It’s just a placeholder.
– I want students to provide me with a better estimate of this number, & explain
why theirs is better.
• Sum the labor and non-labor production costs (above)
• Add overhead costs of 40%, and then a profit (fee) of 20%
– Example: ($13,000 + $10,000 + $1,000) x 1.4 x 1.2 = $40,320
• Express the cost of production in $ per unit.
– Example: $40,320 / 1000 = $40.32 / unit
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Estimation of Total Cost of The Project
• Add together the cost of the prototype to the cost of
production for the stated number of units to obtain
the total cost of the project
– Example: $16,870 + $40,320 = $57,190
• Also express the total cost of the project in dollars
per unit
– Example: $57,190 / 1000 = $57.19 / unit
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Estimation of Minimum Wholesale and
Retail Prices
The High Cost of Distribution
• Start with total product cost per unit
– Example: $57.19 / unit
• Add 20% for wholesaler
– Example: Wholesale price = $57.19 x 1.2 = $68.62 / unit
• Add 50% for Retailer
– Example: Retail price = $68.62 x 1.5 = $102.94 / unit
• Note – The retail price is ~ 10x the price of parts!!!
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