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Engineering Economics

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aman

The document discusses three ways that economic analysis is used in the automotive manufacturing industry: 1) Cost analysis is used to evaluate design alternatives during product development. 2) Investment appraisal techniques are used to analyze capital expenditures. 3) Life cycle costing considers total ownership costs over a product's lifetime to inform pricing, warranty, and service decisions.

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Engineering Economics

Uploaded by

aman
19 views5 pages
The document discusses three ways that economic analysis is used in the automotive manufacturing industry: 1) Cost analysis is used to evaluate design alternatives during product development. 2) Investment appraisal techniques are used to analyze capital expenditures. 3) Life cycle costing considers total ownership costs over a product's lifetime to inform pricing, warranty, and service decisions.

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The document discusses three ways that economic analysis is used in the automotive manufacturing industry: 1) Cost analysis is used to evaluate design alternatives during product development. 2) Investment appraisal techniques are used to analyze capital expenditures. 3) Life cycle costing considers total ownership costs over a product's lifetime to inform pricing, warranty, and service decisions.

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© All Rights Reserved
Download as PDF, TXT or read online from Scribd
Download as pdf or txt
19 views5 pages

Engineering Economics

Uploaded by

aman
The document discusses three ways that economic analysis is used in the automotive manufacturing industry: 1) Cost analysis is used to evaluate design alternatives during product development. 2) Investment appraisal techniques are used to analyze capital expenditures. 3) Life cycle costing considers total ownership costs over a product's lifetime to inform pricing, warranty, and service decisions.

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You are on page 1/ 5

Question (1)

1. Ford:
• Sales: $550,000
• Variable Cost: $600,000
• Fixed Cost: $425,000
a) P.V. Ratio = (Sales - Variable Cost) / Sales
= (550,000 - 600,000) / 550,000
= -50,000 / 550,000
= -0.091 or -9.1% (Since it's negative, it means loss)
b) Contribution = Sales - Variable Cost
= 550,000 - 600,000
= -50,000 (Loss)
c) Break-Even Point (BEP) = Fixed Cost / (Sales price per unit - Variable cost
per unit)
= 425,000 / (550,000 - 600,000)
= 425,000 / (-50,000)
= Not applicable (since BEP cannot be calculated for loss)
d) Profit = Sales - Variable Cost - Fixed Cost
= 550,000 - 600,000 - 425,000
= -475,000 (Loss)
e) Margin of Safety = (Actual Sales - Break Even Sales) / Actual Sales * 100%
= (550,000 - 0) / 550,000 * 100%
= 100%
2. GMC:
• Sales: $650,000
• Variable Cost: $725,000
• Fixed Cost: $250,000
a) P.V. Ratio = (Sales - Variable Cost) / Sales
= (650,000 - 725,000) / 650,000
= -75,000 / 650,000

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= -0.115 or -11.5% (Loss)
b) Contribution = Sales - Variable Cost
= 650,000 - 725,000
= -75,000 (Loss)
c) Break-Even Point (BEP) = Fixed Cost / (Sales price per unit - Variable cost
per unit)
= 250,000 / (650,000 - 725,000)
= 250,000 / (-75,000)
= Not applicable (since BEP cannot be calculated for loss)
d) Profit = Sales - Variable Cost - Fixed Cost
= 650,000 - 725,000 - 250,000
= -325,000 (Loss)
e) Margin of Safety = (Actual Sales - Break Even Sales) / Actual Sales * 100%
= (650,000 - 0) / 650,000 * 100%
= 100%
3. Chrysler:
• Sales: $725,000
• Variable Cost: $350,000
• Fixed Cost: $250,000
a) P.V. Ratio = (Sales - Variable Cost) / Sales
= (725,000 - 350,000) / 725,000
= 375,000 / 725,000
≈ 0.517 or 51.7%
b) Contribution = Sales - Variable Cost
= 725,000 - 350,000
= 375,000
c) Break-Even Point (BEP) = Fixed Cost / (Sales price per unit - Variable cost
per unit)
= 250,000 / (725,000 - 350,000)

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= 250,000 / 375,000
≈ 0.667 or 66.7%
d) Profit = Sales - Variable Cost - Fixed Cost
= 725,000 - 350,000 - 250,000
= 125,000
e) Margin of Safety = (Actual Sales - Break Even Sales) / Actual Sales * 100%
= (725,000 - 375,000) / 725,000 * 100%
≈ 48.28%

Now, let's compile the data into a comparison table:

P.V. Break- Margin of


Contribution
Company Ratio Even Profit ($) Safety
($)
(%) Point (%) (%)

Ford -9.1 -50,000 N/A -475,000 100


GMC -11.5 -75,000 N/A -325,000 100
Chrysler 51.7 375,000 66.7 125,000 48.28

Conclusion: Based on the analysis, Chrysler appears to be the preferable option as it


has a positive profit and a significant margin of safety compared to Ford and GMC,
both of which are incurring losses.

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Question (2)
Analysis for Year 2020:
Given:
- Sales in 2020 = $25,000
- Profit in 2020 = $2,500
Profit Volume Ratio (P.V. Ratio):
P.V. Ratio = (Profit / Sales) * 100%
= (2,500 / 25,000) * 100%
= 10%
Fixed Cost:
Fixed Cost = Total Cost - Variable Cost
= Total Profit - Profit
= $25,000 - $2,500
= $22,500
Break Even Sales:
Break Even Sales = Fixed Cost / P.V. Ratio
= $22,500 / 10%
= $225,000
Company Profit when Sales is $55,000:
Profit = (P.V. Ratio * Sales) / 100%
= (10% * $55,000) / 100%
= $5,500
Sales when Profits are $7,500:
Sales = (Profit * 100%) / P.V. Ratio
= ($7,500 * 100%) / 10%
= $75,000

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Question (3)
Industry: Automotive Manufacturing
1. Cost Analysis in Product Development: Engineering economy techniques are
employed to evaluate the cost-effectiveness of various design alternatives
during product development.

2. Investment Appraisal for Capital Expenditure: Automotive manufacturers


frequently face decisions regarding capital investments in new facilities,
equipment, or technology upgrades.
3. Life Cycle Costing: Automotive companies consider the total cost of ownership
over a product's life cycle, including acquisition, operation, maintenance, and
disposal costs. Life cycle costing methodologies enable manufacturers to make
informed decisions regarding product pricing, warranty policies, and
aftermarket services.

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