Scribd
Upload
100 views22 pages

Engineering Economics Engineering Economics: Engineering Costs and Cost Estimating Engineering Costs and Cost Estimating

This document discusses key concepts in engineering costs and cost estimating. It defines different types of costs such as fixed, variable, marginal, average, sunk, opportunity, recurring, non-recurring, incremental, cash, book, and life-cycle costs. It also discusses how to classify costs, calculate breakeven points, and provides examples of cost estimations. Cost estimating involves determining rough, semi-detailed, or detailed estimates and is important for economic analysis and decision making.

Uploaded by

SagheerKhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
100 views22 pages

Engineering Economics Engineering Economics: Engineering Costs and Cost Estimating Engineering Costs and Cost Estimating

This document discusses key concepts in engineering costs and cost estimating. It defines different types of costs such as fixed, variable, marginal, average, sunk, opportunity, recurring, non-recurring, incremental, cash, book, and life-cycle costs. It also discusses how to classify costs, calculate breakeven points, and provides examples of cost estimations. Cost estimating involves determining rough, semi-detailed, or detailed estimates and is important for economic analysis and decision making.

Uploaded by

SagheerKhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 22

ENGINEERING ECONOMICS

LECTURE 06
Engineering Costs and Cost
Estimating

Engineering Costs
Evaluating a set of feasible alternatives
requires that many costs be analyzed.
Examples include costs for: initial
investment, new construction, facility
modification, general labor, parts and
materials, inspection and quality, training,
material handling, fixtures and tooling,
data management, technical support, as
well as general support costs (overhead).

Engineering Costs
Classifications of costs
Fixed - constant, unchanging
Rent is constant
Typically includes building leases, insurance,
salaries, heating, and lighting costs.

Variable - depend on activity level


Food depends on the number of occupants
Typically vary with the level of production.

Marginal - variable cost for the next unit


Depends on the next unit (adult, child, baby)

Average - total cost/number of units


Rent+ food++n/number of units

Engineering Costs
For example, in a production environment a
fixed cost, such as costs for factory floorspace
and equipment, remains the same even though
the production quantity, number of employees,
or level of work-in-process are varying.
Labor costs are classified as a variable cost
because they depend on the number of
employees in the factory.
Thus fixed costs are level or constant regardless
of output or activity, and variable costs are
changing and related to the level of output or
activity.

Fixed, Variable and Total Costs


Example 1
An entrepreneur named DK was considering
the money making potential of letting a bus to
take people from his hometown to an event in a
larger city.
DK planned to provide transportation, tickets
to the event, and refreshments on the bus for
those who signed up.
He gathered data and categorized these
expenses as either fixed or variable:

Fixed, Variable and Total Costs


Example 1

Profit and Loss Terms


In terms of costs and revenues there are
three possible profit and loss points for a
business activity.
Breakeven: total revenue = total costs
Just getting along

Profit region: total revenue > total costs


Putting money in the bank

Loss region: total revenue < total costs


Going into debt

Profit and Loss

Breakeven Charts
Example 2
DK developed an overall total cost equation for his
business expenses.
Now DK wants to evaluate the potential to make money
from this chartered bus trip.
Total Cost = Total Fixed Cost + Total Variable Cost
= $225 + ($20)(the number of people on the trip)
Let x = number of people on the trip
Thus, Total Cost = 225 + 20x
Using this relationship, DK can calculate the total cost for
any number of people - up to the capacity of the bus.

Breakeven Charts
What he lacks is a revenue equation to offset his costs.
DK's total revenue from this trip can be expressed as:
Total Revenue(TR) =
= (Charter ticket price)(number of people on the trip)
TR = (ticket price)(x)
Profit or loss can now be calculated as:
Total Profit(TP) = [Total Revenue] - [Total Costs]
= [ticket price]x [225 + 20x]
If he charged a charter ticket price of $35, then
= [35x] - [225 + 20x]
TP = 15x - 225

Breakeven Charts
Example 2

Past (Sunk) Costs and


Future (Opportunity) Costs
Sunk cost - money spent due to a past
decision. We cannot do anything about
these costs.
Purchase price paid for a car two years ago.

Opportunity cost - a benefit that is


foregone by engaging a resource in a
chosen activity instead of engaging that
same resource in some other activity. We
make a choice or decision.
Buying lunch instead of gas.

Which amount is the value at present?


Example 3
A distributor of electric pumps must decide what
to do with a "lot" of old electric pumps that was
purchased 3 years ago.
Soon after the distributor purchased the lot,
technology advances were made.
These advances made the old pumps less
desirable to customers.
The pumps are becoming more obsolescent as
they sit in inventory.
The pricing manager has the following
information.

Which amount is the value at present?


Example 3

Price when purchased


Storage costs
List price when purchased
Current list price of new pumps
Amount offered for pumps 2 years ago
Current price that the pumps could be sold for

$ 7,000.00 Sunk cost


Past decisions
$ 1,000.00 Sunk cost
Past decisions
$ 9,500.00 Old list
Past decisions
$ 12,000.00 New list dif erent features Past decisions
$ 5,000.00 Foregone opportunity Past decisions
$ 3,000.00 Market value
Present opportunity

Expense Types
Recurring costs known, anticipated
and occurs at regular intervals.
Purchasing food, paying rent.

Non-recurring costs - one-of-a-kind


event that occurs at an irregular
interval.
Emergency maintenance expenses.
Sometimes we attempt to plan for large non-recurring costs
by buying insurance. Paying the periodic insurance
premium turns this expense into a recurring cost.

Incremental Costs
An incremental cost is the difference between the
costs of two alternatives.
Example 4
Choose between alternative models A and B. What
incremental costs occur with model B?
Costs
Model
Cost Items
Purchase price
Installation costs
Annual maintenance costs
Annual utility expenses
Disposal costs after useful life

A
$ 10,000.00
$ 3,500.00
$ 2,500.00
$ 1,200.00
$ 700.00

B
$ 17,500.00
$ 5,000.00
$ 750.00
$ 2,000.00
$ 500.00

Incremental
$ 7,500.00
$ 1,500.00
$(1,750.00)
$ 800.00
$ (200.00)

Cash Costs vs. Book Costs


Cash costs - movement of money from
one owner to another - also known as a
cash flow.
Payment this month on an auto loan.

Book cost - cost of a past transaction


that is recorded in an accounting book.
Down payment recorded in your
checkbook from last years automobile
purchase.

Life-cycle Costs
Life-cycle - all the time from the initial
conception of an idea to the death of a
product (process).

Life-cycle costs - sum total of all the costs


incurred during the life cycle.

Life-cycle costing - designing a product


with an understanding of all the costs
associated with a product during its life-cycle.

Product Life-cycle

Cost Estimating
Economic analysis is future based.
Costs and benefits in the future require
estimating.
Estimated costs are not known with
certainty.
The more accurate the estimate, the
more reliable the decision.
Estimating is the foundation of
economic analysis.

Types of Estimates
There are three general types of
estimates:
1. Rough order of magnitude, used for
high level planning, inaccurate, range
from -30% to +60% of actual values.
2. Semi-detailed - based on historical
records, reasonably sophisticated and
accurate, -15% to +20% of actual values.
3. Detailed - based on detailed
specifications and cost models, very
accurate, within -3% to +5% of actual.

Summary
This lecture introduced the cost concepts: fixed and
variable, marginal and average, sunk, opportunity,
recurring and nonrecurring, incremental, cash and
book, and lifecycle.
Fixed costs are constant and unchanging as
volumes change, while variable costs change as
output changes.
Fixed and variable costs are used to find the
breakeven value between costs and revenues, as
well as the regions of net profit and loss.
A marginal cost is for one more unit, while the
average cost is the total cost divided by the number
of units.

You might also like