Bautista, Lyra Mae G.

Castillo, Julius C.
Cueto, Christine L.
Manalo, Fatima Therese S.

Engineering Economics Activity #1

Problem 1: During your first month as an employee at Greenfield Industries (a

large drill-bit manufacturer), you are asked to evaluate alternatives for producing
a newly designed drill bit on a turning machine. Your boss' memorandum to you
has practically no information about what the alternatives are and what criteria
should be used. The same task was posed to a previous employee who could not
finish the analysis, but she has given you the following information: An old turning
machine valued at $350,000 exists (in the warehouse) that can be modified for
the new drill bit. The in-house technicians have given an estimate of $40,000 to
modify this machine, and they assure you that they will have the machine ready
before the projected start date (although they have never done any modifications
of this type). It is hoped that the old turning machine will be able to meet
production requirements at full capacity. An outside company, McDonald Inc.,
made the machine seven years ago and can easily do the same modifications for
$60,000. The cooling system used for this machine is not environmentally safe
and would require some disposal costs. McDonald Inc. has offered to build a new
turning machine with more environmental safeguards and higher capacity for a
price of $450,000. McDonald Inc. has promised this machine before the startup
date and is willing to pay any late costs. Your company has $100,000 set aside
for the start-up of the new product line of drill bits. For this situation;

a. Define the problem

- Looking for the least expensive way for setting up capacity to produce
drill bits and at the same time prioritizing the environment and its safety

b. List key assumptions

- the sales in keeping the unit can be identical for both machine
- starting expenses are important
- breakdowns are not frequent
 - previous employee’s data are correct
- drill bits are manufactured the same way regardless of the alternative
chosen
- in-house technicians can modify the old machine so its life span will
match that of the new machine

c. List alternatives facing Greenfield Industries

(1) Buy new machine for $450,000
(2) Let the in-house technicians modify the old machine for $40,000.
(3) Allow McDonald Inc. to modify the machine for $60,000
(4) Find another company to do the work

d. Select a criterion for evaluation of alternatives

- Cost of the machine that can be used for long run or can anticipate a
good production runs, given that quality and delivery time are
essentially not affected
- Meet the standards of producing a new drill bit
- Fast and reliable machine
- Easy and safe to use

e. Introduce risk into this situation

- there is a possibility that the old machine is less productive and efficient
than the new one.
- environmental hazards might happen because of the old machine
- fixing the old machine might results in dissatisfaction
- there is a possibility that old machine is less safe than the new one
f. Discuss how non-monetary considerations may impact the selection.
• safety - in selecting a product or machine, safety always comes first
no matter the cost as long as it is safe to use.
• environmental issues – a product/machine that is eco-friendly is
highly recommended
• difference in quality - Quality over quantity, one high quality product
is better than two low quality in all aspects.
• new machine flexibility - it is important that a machine can do the
work efficiently and effectively depending on its purpose.
• job security for in-house work - it should be considered that the
in-house worker like technicians can ensure that their job will be
secured knowing that the machine will be in a good condition to work
with.
• image of the company - image to outside companies and consumers
by having a new technology such as machine is important to have a
good image for business to grow.

g. Describe how a post-audit could be performed.

Some of the questions should be answered to know and evaluate the
effectivity of the chosen alternatives:
- Did the maintenance costs of the machine acceptable to the budget?
- Did the machine successfully deliver a high-quality product?
- Did the total production costs of the machine can make an acceptable
profit?