Faculty of Engineering & Material Science Engineering Economy - HUMA 701

Winter 2019
Dr. Ramy Shaltout

Assignment # 1 (Date: 12th Sept, 2018)

A company has established that the relationship between the sales price for one of its products
and the quantity sold per month is approximately D = 780 – 10p units (D is the demand or
quantity sold per month, and P is the price in dollars). The fixed cost is $ 800 per month, and
the variable cost is $ 30 per unit produced. What number of units, D*, should be produced per
month and sold to maximize net profit? What is the maximum profit per month related to the
product?

Question (2):

A company produces circuit boards used to update outdated computer equipment. The fixed
cost is $ 42000 per month and the variable cost of $ 53 per circuit board. The selling price per
unit is p = $150 – 0.02D. Maximum output of the plant is 4000 units per month.
a) Determine optimum demand for this product
b) What is the maximum profit per month
c) At what volume does breakeven occur?
d) What is the company’s range of profitable demand?

Question (3):

Claudia has sold her car and received approval from the garage owner to re-lease her downtown
reserved parking spot for the next four months so she can make some extra money. The rental
fee is $200 per month, and she expects to charge $18 per day. Transportation in a car pool will
cost her $6 per day. If there are a maximum of 20 work days per month for re-leasing the spot,
determine the following:
a. Total cost and revenue relations
b. Breakeven quantity per month
c. Amount of money she will make (or lose) if the number of re-leased days per month
over the four-month period are 18, 12, 17, and 20.

Question (4):

A company estimated that the relationship between the unit price and demand per month for a
potential new product is approximated by P = $ 100 – $ 0.1D. The company can produce the
product by increasing fixed costs $ 17,500 per month, and the estimated variable costs is $ 40
per unit. What is the optimal demand, D*, and based on this demand, should the company
produce new product? Why?
a) Work out the complete solution by differential calculus, starting with formula for profit
or loss per month
b) Solve graphically for an approximate answer

Question (5):

A large wood products company is negotiating a contract to sell plywood overseas. The fixed
cost that can be allocated to the production of plywood is one million dollars per month.

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Faculty of Engineering & Material Science Engineering Economy - HUMA 701
Winter 2019
Dr. Ramy Shaltout

The variable cost per thousand board feet is $ 131.5. The price charged will be determined by
P = $700 – (0.05)D per 1000 board feet.
a) For this situation determine the optimal monthly sales volume for this product and
calculate the profit (or loss) at the optimal volume.
b) What is the range of profitable demand during a month?

Question (6):

Wilson Partners manufactures thermocouples for electronics applications. The current system
has a fixed cost of $300,000 per year, has a variable cost of $10 per unit, and sells for $14 per
unit. A newly proposed process will add on-board features that allow the revenue to increase
to $16 per unit, but the fixed cost will now be $500,000 per year. The variable cost will be
based on a $48 per hour rate with 0.2 hour dedicated to produce each unit.
Determine the annual breakeven quantity for the
(a) Current system and (b) the new system.
(b) Plot the two profit relations and estimate graphically the breakeven quantity between
the two alternatives.
(c) Mathematically determine the breakeven quantity between the two alternatives and
compare it with the graphical estimate.

Question (7):

A company produces and sells a consumer product, and thus far has been able to control the
volume of the product by varying the selling price. The company is seeking to maximize its
net profit. It has been concluded that the relation-ship between price and demand per month is
approximately D = 500 – 5 P, where p is the price per unit in dollars. The fixed cost is $ 1000
per month, and the variable cost is $ 20 per unit. Obtain the answer, both mathematically and
graphically, to the following questions:
a) What is the optimal number of units that should be produced and sold per month?
b) What is the maximum profit per month?
c) What are the break even sales quantities (range of profitable demand volume)?

Question (8):

Suppose we know that p = 1000 – D/5, where P = price in dollars and D = annual demand. The
total cost per year can be approximated by $ 1000 + 2D2
a) Determine the value of D that maximizes profit
b) Show in part (a) that profit has been maximized rather than minimized

Question (9):

An engineer collected average cost and revenue data for Arenson’s FC1 handheld financial
calculator. Fixed cost $ 300,000 per year Cost per unit $40
Revenue per unit $70
a. (2 questions) What is the range of the breakeven quantity to variation in the fixed cost
from $200,000 to $400,000 per year? Use $50,000 increments. What is the incremental
change in the breakeven quantity for each $50,000 change in fixed cost?

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Faculty of Engineering & Material Science Engineering Economy - HUMA 701
Winter 2019
Dr. Ramy Shaltout

b. (2 questions) Show the sensitivity of profit to variation in revenue from $55 to $75 per
unit using a $5 increment. Perform this analysis at two sales quantities: (1) the
breakeven quantity for the collected data, and (2) 20% greater than this breakeven
quantity. (Note: Be sure to use the original estimates for FC and cost per unit.)

Question (10):

What amount would need to be paid each January 1 into a savings account if at the end of 15
years (15 payments) you desired $10000? Annual interest is 7%. (Note: the last payment will
coincide with the time of the $10000 balance).

Question (11):

You have just learned that ABC Corporation has an investment opportunity that costs $ 35000
and eight years later pays a lump-sum amount of $100000. The cash flow diagram is shown
below.

What interest rate per year would be earned on this investment? Calculate your answer to be
nearest one-tenth of 1%.

Question (12):

Beckton Steel Products, a company that specializes in crankshaft hardening, is investigating

Question (13):

Soil cleaning company Chemdex Partners plans to finance a site reclamation project that will
require a 5-year cleanup period. If the company borrows $2.3 million now, how much will the
company have to receive in a lump sum payment when the project is over in order to earn 20%
per year compounded quarterly on its investment?

Question (14):

If $ 25000 is deposited now into a savings account that earn 8 % per year, what uniform annual
amount could be withdrawn at the end of each year for ten years so that nothing would be left
in the account after the tenth withdrawal?

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Faculty of Engineering & Material Science Engineering Economy - HUMA 701
Winter 2019
Dr. Ramy Shaltout

Question (15):

Suppose that installation of low-loss thermal windows in your area is expected to save $150 a
year on your home heating bill for the next 18 years. If you can earn 8 % per year on other
investments, how much could you afford to spend now for these windows?

Question (16):

A proposed product modification to avoid production difficulties will require an immediate

Question (17):

Suppose that you have $ 10000 cash today and can invest it at 8 % compound interest each
year. How many years will it take you to become a millionaire?

Question (18):

Maintenance costs for a small bridge with an expected 60-year life are estimated to be $ 1000
each year for the first five years, followed by a $ 10000 expenditure in the 15th year and a
$10000 expenditure in year thirty. If i = 10% per year, what is the equivalent uniform annual
cost over the entire 60-years period?

Question (19):

A 600-ton press used to produce composite material fuel cell components for automobiles using
proton exchange membrane (PEM) technology can reduce the weight of enclosure parts up to
75%. At MARR = 12% per year, calculate (a) capital recovery and (b) annual revenue required.
Installed cost = $3.8 million n = 12 years, Salvage value = $250,000, Annual operating costs _
$350,000 to start increasing by $25,000 per year

Question (20):

You purchase special equipment that reduces defects by $ 10000 per year on an item. This item
is sold on contract for the next five years. After the contract expires, the special equipment will
save approximately $2000 per year for five years.

Question (21):

You assume that the machine has no market value at the end of ten years. How much can you
afford to pay for this equipment now if you require a 20 % annual return on your investment?
All cash flows are end-of-year amounts

Question (22):

An individual is borrowing $100000 at 8% interest compounded annually. The loan is to be

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Faculty of Engineering & Material Science Engineering Economy - HUMA 701
Winter 2019
Dr. Ramy Shaltout

If the lender is till charging 8 % per year, compounded annually, on the unpaid balance of loan,
what is the balance still owed just after the twelfth payment is made?

Question (23):

Brent owns Beck Trucking. Seven years ago, he purchased a large-capacity dump truck for
$115,000 to provide short-haul earth moving services. He sold it today for $45,000. Operating
and maintenance costs averaged $9500 per year. A complete overhaul at the end of year 4 cost
an extra $3200. (a) Calculate the annual cost of the truck at 7% per year. (b) If Brent estimates
that Beck cleared at most $20,000 per year added revenue from using the truck, was the
purchase economically advantageous?

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