University Of Salahaddin

College Of Engineering
Civil Department

Economy And Construction Management

3RD Year student

NAME : Stanick Jamel Slewa

PERSENT IT TO: Dr.Khalil Wali
Introduction
A succinct job description for an engineer consists of two words: problem solver.
Broadly speaking, engineers use knowledge to find new ways of doing things
economically. Engineering design solutions do not exist in a vacuum but within the
context of a business opportunity. Given that every problem has multiple solutions,
the issue is, How does one rationally select the design with the most favorable
economic result? The answer to this question can also be put forth in two words:
engineering economy. Engineering economy provides a systematic framework for
evaluating the economic aspects of competing design solutions. Just as engineers
model the stress on a support column, or the thermodynamic response of a steam
turbine, they must also model the economic impact of their recommendations.
Engineering economy—what is it, and why is it important? The initial reaction
of many engineering students to these questions is, “Money matters will be handled
by someone else. They are not something I need to worry about.” In reality, any
engineering project must be not only physically realizable but also economically
affordable.
Chapter 2
The objective of Chapter 2 is to analyze short-term alternatives when the
time value of money is not a factor. We accomplish this with three types of
problems: 1) economic breakeven analysis; 2) cost-driven design
optimization; and 3) present economy studies
Fixed, Variable, and Incremental Costs
Fixed costs are those unaffected by changes in activity level over a feasible range
of operations for the capacity or capability available. Typical fixed costs include
insurance and taxes on facilities, general management and administrative salaries,
license fees, and interest costs on borrowed capital.
Of course, any cost is subject to change, but fixed costs tend to remain constant
over a specific range of operating conditions. When larger changes in usage of
resources occur, or when plant expansion or shutdown is involved, fixed costs can
be affected.
Variable costs are those associated with an operation that varies in total with
the quantity of output or other measures of activity level. For example, the costs
of material and labor used in a product or service are variable costs, because they
vary in total with the number of output units, even though the costs per unit stay
the same.
An incremental cost (or incremental revenue) is the additional cost (or revenue)
that results from increasing the output of a system by one (or more) units.
Incremental cost is often associated with “go–no go” decisions that involve a limited
change in output or activity level. For instance, the incremental cost per mile for
driving an automobile may be $0.49, but this cost depends on considerations such
as total mileage driven during the year (normal operating range), mileage expected
for the next major trip, and the age of the automobile. Also, it is common to read
about the “incremental cost of producing a barrel of oil” and “incremental cost to
the state for educating a student.” As these examples indicate, the incremental cost
(or revenue) is often quite difficult to determine in practice.
Fixed and Variable Costs
In connection with surfacing a new highway, a contractor has a choice of two sites
on which to set up the asphalt-mixing plant equipment. The contractor estimates
that it will cost $2.75 per cubic yard mile (yd3-mile) to haul the asphalt-paving
material from the mixing plant to the job location. Factors relating to the two
mixing sites are as follows (production costs at eachCost
_____________________________________________ site are the same):
Factor _Site A_ Site B The job requires 50,000 cubic yards of mixed-asphalt-paving material. It is
estimated that four months (17 weeks of five working days per week) will be
Average hauling distance_ 4 miles _3 miles
required for the job. Compare the two sites in terms of their fixed, variable,
Monthly rental of site_ $2,000_ $7,000 and
Cost to set up and remove equipment _$15,000 _$50,000 total costs. Assume that the cost of the return trip is negligible. Which is the
Hauling expense_ $2.75/yd3-mile_ $2.75/yd3-mile better site? For the selected site, how many cubic yards of paving material
Flagperson_ Not required_ $150/day does
the contractor have to deliver before starting to make a profit if paid $12 per
cubic yard delivered to the job location?
Cost Fixed Variable Site A Site B Site B, which has the larger fixed costs, has the smaller total cost for the
Rent √ = $8,000 = $28,000 job. Note that the extra fixed costs of Site B are being “traded off” for reduced
Setup/removal √ = 15,000 = 50,000 variable costs at this site.
Flagperson √ = 0 5(17)($150) = 12,750 The contractor will begin to make a profit at the point where total revenue
equals total cost as a function of the cubic yards of asphalt pavement mix
Hauling √ 4(50,000)($2.75) = 550,000 3(50,000)($2.75) = 412,500 delivered. Based on Site B, we have
Total: $573,000_ $503,250 3($2.75) = $8.25 in variable cost per yd3 delivered
Total cost = total revenue
$90,750 + $8.25x = $12x
x = 24,200 yd3 delivered.
Therefore, by using Site B, the contractor will begin to make a profit on the
job after delivering 24,200 cubic yards of material.
The Total Revenue Function
The total revenue, TR, that will result from a business venture during a given period
is the product of the selling price per unit, p, and the number of units sold, D.
Thus,
TR = price × demand = p · D.
Cost, Volume, and Breakeven Point Relationships
Fixed costs remain constant over a wide range of activities, but variable costs vary The optimal value of D that
in total with the volume of output (Section 2.1.1). Thus, at any demand D, total maximizes profit is
cost is D∗ = a − cv/2b .
CT = CF + CV, (2-7) To ensure that we have
where CF and CV denote fixed and variable costs, respectively. For the linear maximized profit (rather
relationship assumed here, than minimized it), the
CV = cv · D, sign of the
second derivative must be
negative. Checking this,
which will be negative for b > 0 (as specified earlier). we find that
An economic breakeven point for an operation occurs when total d2(profit)/dD2 = −2b
revenue
equals total cost. Then for total revenue and total cost, as used in the
development
of Equations (2-9) and (2-10) and at any demand D,
Total revenue = total cost (breakeven point)
aD − bD2 = CF + cvD −bD2 + (a − cv)D − CF = 0.
A company produces an electronic timing switch that is used in consumer and
commercial products. The fixed cost (CF) is $73,000 per month, and the variable
cost (cv) is $83 per unit. The selling price per unit is p = $180 − 0.02(D), based D′ = −97 ± [(97)2 − 4(−0.02)(−73,000)]
on Equation (2-1). For this situation, 0.5
(a) determine the optimal volume for this product and confirm that a profit 2(−0.02)
occurs (instead of a loss) at this demand. D′
(b) find the volumes at which breakeven occurs; that is, what is the range of 1 = −97 + 59.74
profitable demand? Solve by hand and by spreadsheet. −0.04 = 932 units per month
Solution by Hand: D′
(a) D∗ = a − cv 2 = −97 − 59.74
2b = $180 − $83 −0.04 = 3,918 units per month.
2(0.02) = 2,425 units per month [from Equation (2-10)]. Thus, the range of profitable demand is
Is (a − cv) > 0? 932–3,918 units per month.
($180 − $83) = $97, And is (total revenue − total cost) > 0 for D∗ = 2,425 units per month?
[$180(2,425) − 0.02(2,425)
2] − [$73,000 + $83(2,425)] = $44,612
A demand of D∗ = 2,425 units per month results in a maximum profit of
$44,612 per month. (b) Total revenue = total cost (breakeven point)
−bD2 + (a − cv)D − CF = 0 [from Equation (2-11)]
−0.02D2 + ($180 − $83)D − $73,000 = 0
−0.02D2 + 97D − 73,000 = 0
An engineering consulting firm measures its output in a standard service hour
unit, which is a function of the personnel grade levels in the professional staff.
The variable cost (cv) is $62 per standard service hour. The charge-out rate
[i.e., selling price (p)] is $85.56 per hour. The maximum output of the firm is
160,000 hours per year, and its fixed cost (CF) is $2,024,000 per year. For this
firm,
(a) what is the breakeven point in standard service hours and in percentage of
total capacity?
(b) what is the percentage reduction in the breakeven point (sensitivity) if fixed
costs are reduced 10%; if variable cost per hour is reduced 10%; and if the
selling price per unit is increased by 10%?
Solution
(a)Total revenue = total cost (breakeven point)
pD′ = CF + cvD′
D′ = CF
(p − cv)
D′ = $2,024,000
($85.56 − $62) = 85,908 hours per year
D′ = 85,908
160,000 = 0.537,
or 53.7% of capacity
Choosing the Most Economic Material for a Part
A good example of this situation is illustrated by a part for which annual
demand is 100,000 units. The part is produced on a high-speed turret lathe,
using 1112 screw-machine steel costing $0.30 per pound. A study was conducted
to determine whether it might be cheaper to use brass screw stock, costing $1.40
per pound. Because the weight of steel required per piece was 0.0353 pounds
and that of brass was 0.0384 pounds, the material cost per piece was $0.0106
for steel and $0.0538 for brass. However, when the manufacturing engineering
department was consulted, it was found that, although 57.1 defect-free parts
per hour were being produced by using steel, the output would be 102.9 defectfree parts per hour if brass were used. Which
material should be used for this part?
Solution
The machine attendant is paid $15.00 per hour, and the variable overhead costs for the turret lathe are estimated to be $10.00
per hour. Thus, the total cost comparison for the two materials is as follows:
1112 Steel _Brass
Material $0.30 × 0.0353 = $0.0106 $1.40 × 0.0384 = $0.0538
Labor $15.00/57.1 = 0.2627 $15.00/102.9 = 0.1458
Variable overhead $10.00/57.1 = 0.1751 $10.00/102.9 = 0.0972
Total cost per piece $0.4484 $0.2968
Saving per piece by use of brass = $0.4484 − $0.2968 = $0.1516
Because 100,000 parts are made each year, revenues are constant across the
alternatives. Rule 2 would select brass, and its use will produce a savings of
$151.60 per thousand (a total of $15,160 for the year)
Choosing the Most Economical Machine for Production
Two currently owned machines are being considered for the production of a part.
The capital investment associated with the machines is about the same and can
be ignored for purposes of this example. The important differences between the
machines are their production capacities (production rate×available production
hours) and their reject rates (percentage of parts produced that cannot be sold).
Consider the following table:
Machine A Machine B
Production rate 100 parts/hour 130 parts/hour
Hours available for production 7 hours/day 6 hours/day
Percent parts rejected 3% 10%
The material cost is $6.00 per part, and all defect-free parts produced can
be sold for $12 each. (Rejected parts have negligible scrap value.) For either
machine, the operator cost is $15.00 per hour and the variable overhead rate for
traceable costs is $5.00 per hour.
(a) Assume that the daily demand for this part is large enough that all defect-free
parts can be sold. Which machine should be selected?
(b) What would the percent of parts rejected have to be for Machine B to be as
profitable as Machine A?