Chapter 2 – Elementary Economic Analysis

Overview/Introduction

Whether it is a business situation or a day-to-day event in somebody’s personal life,

there are a large number of economic decisions making involved. One can manage many of
these decision problems by using simple economic analysis. Under such a situation, the
procurement of the goods/services should be decided in such a way that the overall cost is
minimized.

Learning Outcome/Objective

At the end of this chapter, the students should be able to:

1. Compare alternatives with elementary economic analysis
2. Internalized the use and importance of elementary economic analysis

Learning Content/Topic

Elementary Economic Analysis

(Chapter 2 – Lesson 4)

Whether it is a business situation or a day-to-day event in somebody’s personal life,

there are a large number of economic decisions making involved. One can manage many of
these decision problems by using simple economic analysis.
Simple economic decisions are affected by several factors such as
 Prices of the goods;
 Cost of labor; and
 Quality of the goods/services.
Under such a situation, the procurement of the goods/services should be decided in
such a way that the overall cost is minimized. The minimization of the overall cost of a product
without sacrificing the quality is determined by
 Cheaper raw material;
 Lesser raw material;
 Reduced process time; and
 Better value for money.

Example Solve 1 – Material Selection for a Product

Problem Statement
In the design of a jet engine part, the designer has a choice of specifying either an
aluminum alloy casting or a steel casting. Either material will provide equal service, but the
aluminum casting will weigh 1.2kg as compared with 1.35kg for the steel casting.
The aluminum can be cast for ₱80.00/kg and the steel one for ₱35/kg. The cost of
machining per unit is ₱150 for aluminum and ₱100 for steel. The design weight of jet engine
part is 1.25kg. Every kilogram of excess weight is associated with a penalty of ₱1,300 due
to increased fuel consumption. Which material should be specified and what is the economic
advantage of the selection per unit?

Solution
Goal
 Find between the two alternatives will cost less for the production of jet engine part.
Given
Aluminum Cast
Weight of aluminum casting = 1.2kg
Cost of making aluminum casting = ₱80/kg
Cost of machining aluminum cast = ₱150
Excess weight = 0
Penalty of excess weight = 0 (did not exceed 1.25kg)
Steel Cast
Weight of steel casting = 1.35kg
Cost of making steel casting = ₱35/kg
Cost of machining steel cast = ₱100
Excess weight =0.1kg
Penalty of excess weight = ₱1300/kg
Comparison
Total cost of aluminum cast
Total Cost =Cost of casting +Cost of machining+ Penalty
Total Cost =(₱ 80
kg )
∗1.2 kg + ₱ 150+ 0

Total Cost =₱ 246

Total cost of steel cast
Total Cost =Cost of casting +Cost of machining+ Penalty
Total Cost =(₱ 35
kg )
∗1.35 kg + ₱ 100+ (
₱ 1,300
kg
∗0.1 kg )
Total Cost =₱ 277.25
Decision
The total cost of jet engine part made of aluminium is less than that of jet engine part
made of steel. Therefore, the jet engine part should be made with aluminium cast for
an economic advantage.

Example Solve 2 – Design Selection for a Product

Problem Statement
Two alternatives are under consideration for a tapered fastening pin. Either
design will serve the purpose and will involve the same material and manufacturing cost
except for the lathe and grinder operations.
Design A will require 16 hours of lathe time and 4.5 hours of grinder time per
1,000 units. Design B will require 7 hours of lathe time and 12 hours of grinder time per
1,000 units. The operating cost of the lathe including labor is ₱200 per hour. The
operating cost of the grinder including labor is ₱150 per hour. Which design should be
adopted and what is the economic advantage of the best alternative?

Solution
Goal
Come up with the best design alternative and its economic advantage.
Given
Design A
Lathe time / 1000 units = 16 hours
Grinding time / 1000 units = 4.5 hours
 Design B
Lathe time / 1000 units = 7 hours
Grinding time / 1000 units = 12 hours
Cost Labor for both Designs
Cost of lathe operation = ₱200/hour
Cost of grinder operation = ₱150/hour
Comparison
Total cost of design A
Total Cost =Cost of lathe operation+ Cost of grinding
Total Cost =(₱ 200
hr )(
∗16 hrs +
₱ 150
hr
∗4.5 hrs )
Total Cost =₱ 3,875
Total cost of design B
Total Cost =Cost of lathe operation+ Cost of grinding
Total Cost =(₱ 200
hr )(
∗7 hrs +
₱ 150
hr
∗12 hrs)
Total Cost =₱ 3,200
Decision
The total cost of design A is less than that of design B. Hence, for the production of
tapered fastening pin, Design A should be adopted with an economic advantage of
₱675/1000units.

Example Solve 3 – Process Planning

Problem Statement
The process planning engineer of a company listed the sequence of operations
to come up with a product. Each sequence has different processes with different cost
and duration of operation as shown on the table below.

Find the most economical sequence of operations to manufacture the product.

Solution
Sequence A
Cost of Operation=Cost of operation per minute∗Duration∈minute
₱4
Cost of Turning= ∗5 mins=₱ 20
min
 ₱7
Cost of Milling= ∗8 mins=₱ 56
min
₱6
Cost of Shaping= ∗10 mins=₱ 60
min
₱5
Cost of Drilling= ∗3 mins=₱ 15
min
Total Cost =₱ 20+ ₱ 56+ ₱ 60+ ₱ 15=₱ 151
Sequence B
Cost of Operation=Cost of operation per minute∗Duration∈minute
₱4
Cost of Turning= ∗5 mins=₱ 20
min
₱7
Cost of Milling= ∗14 mins=₱ 98
min
₱5
Cost of Drilling= ∗3 mins=₱ 15
min
Total Cost =₱ 20+ ₱ 98+ ₱ 15=₱ 133
Sequence C
Cost of Operation=Cost of operation per minute∗Duration∈minute
₱ 17
Cost of CNC Operation = ∗8 mins=₱ 136
min
Decision
Sequence B has the least total cost of operation. Therefore, it should be selected for
manufacturing the product.

Teaching and Learning Activities

Problem Set
A Construction Company is Manila will bid in the digging of an
irrigation canal in a nearby province which measure 2 meters wide, 1 meter
deep, and 2 km long. Twenty laborers will be employed at P120.00 each per
day, and they can dig, on the average, ½ cu. m. per hour. In addition, 2
foremen will also be employed at P250.00 each per day.

A ditch-digging machine may be rented at a cost P750.00 a day, in

actual use and in transit toand from the construction site. In actual rate, fuel
and oil will cost P280.00 per a day. It takes one day, each way, for
transporting the machine. Freight charges for transporting the machine will
be P1, 200 each way. The machine operator accompanies the machine and
is paid P280.00 each day. The services of 2 laborers would also be needed,
in addition to the services of the machine. The machine can dig 1 cu. m.
every 4 minutes.

Allowing P20, 000 for profit and contingencies, determine the lowest bid price of
the company.
Chapter Quiz

An engineer bidding on the asphalting of a 7-km stretch of road is

confronted with the problem of choosing between two possible sites on
which to set up the asphalt-mixing machine. At site A, the average hauling
distance is 2.5 km; the monthly rental would be ₱3,500 and the cost of
installing and dismantling the equipment would be ₱17,000. At site B, the
average hauling distance is 3.25 km; the monthly rental would be ₱650 and
the cost of installing and dismantling the equipment would be ₱7,200. The
asphalt mix is to be hauled by a sub- contractor at ₱0.42 per cu. m. per km
of haul. At site A, it would be necessary to hire 2 flagmen at ₱15.00 each
per workday. The job can be completed in 30 weeks or 7 months working 6
days a week. The project requires 16,670 cu. m. of asphalt mix per km of
road. Which site should he choose and how much lower would his bid price
be if he made the better choice?