COST CONCEPT AND DESIGN ECONOMICS

Why does anybody (intentionally or unintentionally) do anything

wrong/sinful?
Out of IGNORANCE – means anybody is able to capture knowledge but does
not care.
So, here ignorance means he/she does not try to realize the magnitude of
rewards awaiting or gravity of punishment awaiting.

Learning outcomes of this topic:

 Learn to make cost estimates
 Learn how to allocate indirect costs

TOPICS
• Cost estimation approaches
• Unit method
• Cost index method
• Cost-capacity relations
• Factor method
• Learning curve relation
• Indirect cost allocation

TYPES OF COSTS TO ESTIMATE

 Direct – labor, machine and material costs
-- Estimate in detail to extent possible
 Indirect – support functions, management, warranty, legal, taxes
-- Estimate using standard rates and factors
Technology, automation, human labor costs
 Have caused indirect costs to be a much larger percentage of total project or
system cost
 Require that more accurate methods of indirect cost estimation be applied

Designing product/project/system to see a balance between:

 Economically acceptable, and
 Technically feasible
So, integrate cost concepts, principles of EE and design considerations.

Cost estimation – present and future cost consequences of engineering designs.

Project and uniqueness.… Purposes of cost estimation:
 For determining selling price.
 Determining feasibility of taking a proposed project/product.
 Justification on capital investment for process changes or improvements.
 Benchmarks for productivity improvement programs.

Direct cost examples

• Physical assets
• Maintenance and operating costs (M&O)
• Materials
• Direct human labor (costs and benefits)
• Scrapped and reworked product
• Direct supervision of personnel

Indirect cost examples

• Utilities
• IT systems and networks
• Purchasing
• Management
• Taxes
• Legal functions
• Warranty and guarantees
• Quality assurance
• Accounting functions
• Marketing and publicity

Questions that can guide direct cost estimation

 What components of cost must be estimated?
Labor, materials, assets, M&O, training, etc.
 What estimation approach is best to use?
Design-to-cost or bottom-up approach is common
 What level of estimation accuracy is needed?
 Design stage uses order-of-magnitude for ± 20% accuracy; detailed design
requires accuracy in ± 5% range
 What estimation techniques are best to use?
Tables, software, unit, index, factor, cost-capacity, learning curve, expert opinion,
comparison, etc.

What components of cost must be estimated?

• Depends upon complexity of project or system
• Some common components that need estimates
 Asset first costs, plus delivery and installation costs (P)
 Direct labor costs
 Direct material costs
 Annual operating costs (AOC) – also called M&O for maintenance
and operating costs
DIRECT COSTS + INDIRECT COSTS ± PROFIT MARGIN (loss) = PRICE

Cost estimation approach

1. Top-down based on historical data from similar projects. Used early in the
estimating process to evaluate alternatives.
2. Bottom-up – in fine detail into small and manageable cost estimates and
economic consideration after a project/product is conceived.
Bottom-up approach
 Price is considered an output variable
 Cost estimates are input variables
 Best applied when competition is not a threat
 Historically used in Western engineering cultures

Top-down approach
 Cost is considered an output variable and is the „target‟ cost
 Best applied in early stages of design
 More likely to encourage innovation, new designs, and efficiency
 Historically used in Eastern manufacturing

Ex. Year-by-year cost for your study at IUT

 Tuition and other fees
 Books and supplies
 Living expenses
 Transportation
 Year Tuition fees, room Book, supplies, and Total estimated
rent, food other expenses cost for year
1
2
3
4
Grand total

Then calculate the total average cost per month, per year, per credit hour, etc.

Accuracy of Estimates - What level of estimation accuracy is needed?

 No estimate can be exact
 Must be reasonable and accurate enough to support a reliable economic
analysis
 In preliminary design phase
 Estimates are considered „first cuts‟
 Order-of-magnitude estimates in the ± 20% range
 However, in detailed design phase
 Accuracy must support analysis for „go-no go‟ decision
 Estimates expected to be in ± 5% range
 Accuracy vs. time spent in making estimates

• Excellent cost indexes are maintained in areas such as construction,

chemical and mechanical industries
 Updated monthly and annually; many include regionalized and international
project indexes
Indexes in these areas are often subdivided into smaller components and can be
used in preliminary, as well as more detailed design phases
Cost Estimating Relationships (CER)
 Generically different approaches than index method
 Use equations to estimate cost based on design variables
Example design variables:
 Speed
 Weight
 Thrust
 Size
 Capacity
 Mileage

Some CER models:

 Cost-capacity
 Factor
 Learning curve

Cost-Capacity Equations
Also called power law and sizing model

If x = 1, relationship is linear

• If x > 1, larger capacities will cost more than a linear cost relation
(diseconomies of scale)
 • If x < 1, larger capacities will cost less than a linear cost relation
(economies of scale)
• Usually, 0 < x ≤ 1 (economy of scale predicted)
• If x is not tabulated or estimable, use x = 0.6
 Called six-tenth model
 Historically used in chemical processing industry
• Example data sources of x values:
 Chemical Engineer‟s Handbook
 Plant Design and Economics
 UN Food and Agriculture Organization (fishery industry)
Sample exponent values for equipment and plants

Ex. In year 2000, aerobic digester equipment with flow rate of 0.5 MGD
(million gallons per day) was installed at a cost of $1.7 million
Estimate cost for 2.0 MGD
x = 0.14 from table for 0.2 – 40 MGD aerobic digester
Q2 = 2.0 MGD Q1 = 0.5 MGD C1 = $1.7 million
0.14
C2 = 1.7 million (2.0/0.5) = $2.06 million
Note: There is good economy of scale since x << 1.0
Capacity is 4x larger, but estimated cost increases by only 21%

Cost-capacity exponents do not change with time; no cost indexing is included

Multiply by cost index (It/I0) to adjust for time and obtain estimate of current cost
(i.e., in constant-value dollars

Example: Estimate cost of aerobic digester if cost index has increased from 131 in
2000 to 225 this year
C2 = 1.7 million (2.0/0.5)0.14(225/131) = $3.545 million
Note: Time adjustment caused cost estimate to increase 108% from $1.7
million in year 2000

Factor method estimates total plant costs for processing industries

o Concept and factors first developed by Hans Lang
Multiply total first cost of major equipment by h, an overall cost factor or a sum of
several cost factors which relate to major components or stages of the

■ Using a cost factor for each major cost component, such as construction,
maintenance, labor, indirect costs, h is

■ i = 1,…,n are the components

■ To estimate total plant cost:
 Determine estimated total cost of capital equipment
 Define major components
 Find their cost factors for the type of plant being developed
Multiply equipment cost by h to estimate CT
First cost of all equipment is P = $273,000
Major components and cost factors
Component Cost factor
Installation of hardware 0.49
Construction 0.53
Indirect costs 0.21

h = 1 + 0.49 +0.53 + 0.21 = 2.23

CT = 2.23(273,000) = $608,790

 If cost components are not defined in early design stages, use h = 4 to estimate
total plant cost
 If indirect costs are separately estimated based on total direct costs of the plant:
 h does not include indirect cost component
 separate indirect cost factor fI is inserted

Note: Be sure to understand the basis for the factors before calculating CT

Learning Curve method

• Based on often observed fact that completion time of repetitive tasks
decreases at an approximate constant rate every time production is doubled
• Developed primarily for repetitive task manufacturing and process
industries; yet, it works in a much broader set of environments
• Model estimates time to complete Nth unit, not cost and not total or average
completion time
• For example, if reduction is 10%, learning rate is 90%

Take log of Tn to obtain straight line equation

log T = log T + s log n
n 1
Total cost of n units is cost per unit c times sum of T1 through Tn time estimates
CT = c(T1 + T2 + … + Tn)
Learning curve time estimates are best for smaller lots up to ~200 units
Usually, large quantity lots do not experience continued learning, so completion
time does not decrease according to the doubling assumption in this model

Ex. T1 = 200 hours Lot size is 25

Learning rate = 80% Cost = $50 per hour
Learning curve slope:
s = log 0.8/log 2 = - 0.0969/0.301 = - 0.322
Estimated cost of unit 1:
C1 = 50(200) = $10,000
th
Estimated time to complete 5 unit:
s -0.322
T5 = T1 × n = 200(5) = 119.1 hours
Estimated cost of unit 5:
C1 = 50(119.1) = $5,955
Total time to complete entire lot:
Sum T1 to T25 = 2461.4 hours
Estimated cost of lot of 25 units:
C1 = 50(2461.4) = $123,070

Cost reduced by ~40% in first 5 units

Indirect Cost (IC) Estimation
• Indirect costs are not directly associated with a specific product or
process
• Also called overhead costs
• Indirect cost examples (activities and departments)
 Planning and scheduling  Supervision
 General maintenance  Quality and inspection
 Human resources  Safety
 Taxes  Security
 Legal  and the list goes on…
• Indirect costs are usually allocated to primary producing departments
quarterly, semiannually, and annually
 Fixed, variable, and incremental costs
Fixed costs – unaffected by the volume of product/s or change of activity for a
given capacity. General management salaries, insurance and taxes on facilities,
license fees, interest costs on loan.
Variable costs – associated with the volume of production or level of activity.
Direct material and direct labor costs, other directly related resources‟ costs. Prime
cost.
Incremental costs or revenue - additional cost, or income, that results from
increasing the output by one or more unit/s. “for hiring a new facility at this state”,
“increasing the cost producing one more unit”.

Ex.
Comparing alternatives

Cost Site A Site B

Production cost $500,000 $500,000
Average hauling distance 6 km 4.3 km
Monthly rental of site $1,000 $5,000
Cost to set up and remove equipment $15,000 $25,000
Hauling Expense $1.15/m3-km $1.15/m3-km

Material required 50,000 m3 and time required 4 months or 17 weeks (5-day

week). If site B is selected, there will be an added charge of $96 per day for a
security. Price of material $8.05/m3.
Compare the sites in terms of fixed, variable, and total cost.

Solution:
Cost item Fixed Variable Site A Site B
Rent Y - 4,000 20,000
Setup/removal Y - 15,000 25,000
Hauling - Y 345,000 247,250
Security Y - 8,160
Total 364,000 300,410
6*50,000*1.15 = 364,000. 5*17*96 = 8,160
What would be material quantity for the better site where total revenue equals total
cost (in m3)?
Variable cost per m3 for 4.3 km = 4.3*1.15 = 4.95.
Now R = TC
Or, 8.05 x = (20,000 + 25,000 + 8,160) + 4.95x

Recurring and Nonrecurring costs

Recurring costs – repetitive costs (variable costs). Repeatable fixed cost (office
space rental).
Nonrecurring costs – not repetitive. Developing capacity to operate (constructing a
building).

Direct, indirect, and standard costs

Direct – material, worker or any other directly associated with a product or service.
Indirect – neither fixed or variable. Proportion goes either way based on some
formula. Overhead/operating and other burdens (electricity, repair, property tax,
supervision, etc.).
Standard cost – representative costs per unit of output estimated beforehand
(advance of production). Anticipated labor, material and overhead cost.

Cash cost vs book cost

Cash cost and noncash cost – payment of cash, or not cash. Noncash cost is often
known as book cost (recovery of past expenditure over a given period of time). Ex.
of book cost is depreciation charge for the use of an asset.

Sunk cost – occurred in the past and has no relevance to estimates of future costs
and revenues related to alternative course of action. It is common to all
alternatives. But is not part of future cash flows, so, not used in EE.

Opportunity cost
Foregone opportunity (hidden/implied) for a resource being used in an alternative.

-cycle cost
Very important. Summation of all costs, both recurring and nonrecurring, related to
a product, structure, system or service during its lifespan.

Estimation Techniques - What estimation techniques are best to use?

Preliminary design phase estimators:
 Unit cost method – very preliminary and very popular
 Cost index method – bases present cost estimates on past cost experiences;
inflation adjusted
 Cost-estimating relationships (CER)
 Factor method
 Cost-capacity equations
 Learning curve

These are all discussed below.

Detailed design phase estimators:
 Various software packages and tabulated handbooks
 These include timely data bases with indexes and factors specific to an
industrial sector
 Other useful methods in any design phase:
 Expert opinion
 Comparison with known installations
 Past experience in the field
 Note: Estimates outside the ± 15% or 20% range are not reliable; don‟t use
them as the design process continues.

Unit Method
 Used commonly by estimators and in daily life
 Provides very preliminary estimates
 Cost factors must be updated to remain timely
 Equation for total cost Ct is simply
Ct = unit cost factor × number of units

Example: New boat construction costs average u = $2,500 per square meter. Size
of the boat Q = 400 m2

Example: Unit cost factors can be used to develop a preliminary cost estimate for a
multi-component system
• Table below shows 5 resources with u and q values
• Preliminary cost estimate is sum of terms
Item/resource Amount q Unit cost Cost estimate uQ
factor, u
Materials 3,000 tons
Machinery, tooling 1,500 hours
Labor, casting 3,000 hours
Labor, finishing 1,200 hours
Labor, indirect 400 hours
Total estimated cost

Cost Index Method

• Index is ratio of cost today to cost in past
• Indicates change in cost over time; therefore, considers impact of inflation
• Index is dimensionless
• CPI (Consumer Price Index) is a good example
• Equation for total cost is
( )
= estimated cost at present time, t
=cost at a base/previous time, t0
= index value at time t
= index value at base time, 0
Ex. Construction project cost $3.4 million 5 years ago. Skilled labor cost
component then was 25% or $850,000. Skilled labor index then was 3496; Same
index this month is 4038
Total cost estimate now
Ct = 850,000(4038/3496) = $981,780

Jump forward in time - assume actual cost for skilled labor is reported as $1
million when construction is complete. Solve for It for index value that should
have been used
( ) = 3496 (1,000,000/850,000) = 4113
 Cost, volume, and BEP relationships. BREAK-EVEN ANALYSIS
(OR, COST-VOLUME-PROFIT ANALYSIS)

Goal: To select the potential product/service that commits organization‟s resource

to specific production objectives.
Purpose/objectives of the study of break-even analysis:
For decision making, following information are often available from this analysis:
(1) Volume at which the output become profitable.
(2) Will the predicted sales volumes for the assumed prices be profitable?
(3) For the known fixed costs, what must the variable costs be to make
profit?
(4) For the variable cost given, what must the fixed cost be to make a profit
(5) How will the break-even volume changes as the price increase or
decrease?
(6) Which proposal/project/product/service will be more profitable/ viable
among several proposals /projects?
(7) Evaluation of future uncertainty

How?
It is a part of economic analysis on production plans to determine preferred
pricing, servicing, manufacturing and scheduling policies.
Your Proposal: Add new product or expand the existing facility/capacity.
To Analyst:
Additional revenue to be generated by new production capacity > or = additional
expected cost?
Production cost function = f (capacity for a process/ facility)
= f (type and size of equipment to be used, size of the capacity/facility, number &
skill of worker needed, types of raw materials)
An example: large capacity process requires larger and more expensive equipment
and larger facilities than do small capacity process.
Fixed costs of production are larger, but incremental cost for producing additional
units (marginal cost) is smaller than…

What is break-even analysis (BEA)?

Break-even analysis (BEA) can give the answer, which determines the level of
output at which additional revenue equals the additional cost of adding capacity.
That is, at what point will be break even, or when will revenues equal cost? At
certain sales volume or demand level, what revenues will be generated? If we add a
new product line, will this action increase revenue?

What are considered for BEA?

a. Fixed cost- the cost that do not depend / vary with the level
(volume/quantity) of production of certain goods/services. Example:
building rent, insurance, property taxes, depreciation, administrative salaries,
capital interests, etc.
b. Variable costs- Costs that vary/depend the level of production. Example:
raw materials costs, production labor costs, direct energy cost, etc.
c. Revenue or return – The income from the selling of products/services.
d. The effect of different volumes of production.

Basics of Analysis:
Using simplified income or profit-and-loss statement which can be written as,
Revenue (price x units sold) = fixed costs + variable costs (var. cost per unit x
units) + (-) profit (loss)
Assumptions:
(a) Fixed costs will remain constant irrespective of level of production.
(b) Variable costs will be directly proportional to the volume of production.
(c) The price will remain constant throughout the period.
(d) Units produced by the firm are being sold in the market.

Method of Analysis:
1. Graphical Method: assist communication among decision makers. Easy,
because both cost & revenue are linear relationships called CVP graph.

Steps to draw the graph:

(1) Draw axes (x for quantity/volume and y for money). Be careful about the
scale.
(2) Draw F line parallel to x axis.
(3) Draw variable cost line
(4) Compute TC + F + V
(5) Draw TC line
(6) Compute R and draw the line.
(7) Label the graph. See BEP, profit loss area, angle of incidence, and other
implications.

R Revenue line Profit area

or Total cost line Break even point Variable cost line

Cost

Loss Area

------------------------------------------------

Fixed Cost

Volume of production units produced /sold or, capacity (%)

Ex. Fixed cost = Tk36,000

Variable cost per unit = Tk4
Price of each unit = Tk 10. What is the BEP = ?

Crossover Chart: Putting several charts together for the different processes that
expected to have different costs, at any given volume of output (only one will have
the lowest cost)

TCL

TCL FCL

FCL TCL FCL

Q Q Q
Low Volume, Process-A Repetitive, Process-B High vol. low variety Process-C

$ TCL-A TCL-B TCL-C

FCL-C

FCL-A

Q1 Q2 Volume

2. Algebraic method: Support the graph and use to test sensitivity of break-
even decisions.
We know,
Revenue= fixed costs + var. costs± profits/loss
Or,
Or, ,
Or, where p > v
At Break-even Point (BEP) where sales amount /volume is just enough to cover the
fixed plus variable cost of operation without either earning profit or suffering a
loss. The firm just breaks even.
That is, at BEP, Z =0
………Break even quantity
BEP ($)
Unit contribution = (p - v); total contribution margin = R - V

Unit contribution serves to pay off the fixed cost. When Q exceeds BEP (Q), (p-v)
is the incremental profit expected from each additional unit made and sold.

Another way, or or or
 , Here R = sales

Now . So,

Ex. Fixed cost = Tk 36,000

Variable cost per unit = tk40
Price of each unit = tk100
What is the BEP = ?

Multiproduct Case:
You know, most firms have a variety of offerings. Each offering may have
different selling price and variable cost. Now, to reflect the proportion of sales for
each product, we use weighting of each product‟s contribution by its proportion of
sales. That is,
∑( )

Where, = var. cost per unit of product i

= price (per unit) of product i
wi = percent each product is of the total sales.

Ex. Fixed cost = 3500 per month. Other data are as follow:
Item(i) (1) Price (p) (2) Cost (v) (3) Forecasted units‟
sales (4)
Sandwich 2.95 1.25 7,000
Soft drink 0.80 0.30 7,000
Baked 1.55 0.47 5,000
potato 0.75 0.25 5,000
Tea 2.85 1.00 3,000
Salad bar

Solution:
 ∑( )
v/p (5) 1-v/p (6) Forecasted sales Proportion of Weighted
value (7) = sales value (9) =
(2)x(4) (8)=(7)/46,300 (6)x(8)
.42 .58 20,650 0.446 0.259
.38 .62 5,600 0.121 0.075
.30 .70 7,750 0.167 0.117
.33 .67 3,750 0.081 0.054
.35 .65 8,550 0.185 0.120
46,300 1.000 0.625
So, = 67,200
∑( )

Total daily sales = 67200/52×6 = 215.38

So, manager gets information what must be sold each day.

Make-or-buy Decision (Evaluating Processes)

Buy Make

Q= (

Break point quantity Buy

Make

Fm

Fb

Quantity(Q)

Other factors (quantitative&qualitative)

 1. Idle plant capability
2. In house capabilities ( personal, future capabilities )
3. Reliability of supply
4. Reciprocity
5. Employment stabilization
6. All resources uses,
7. Economic advantage

Make-or-Buy Decision

Buy Make
Fixed costs $0 $300,000
Variable costs $9 $7

=150,000 patrons

Two Process choices

Labor Intensive Capital Intensive

(Option 2) (Option 1)

Option1

Option2

Quantity ( Q)
Nonlinear Relationships
Total revenue function
Total cost line or total revenue line cannot be linear in most practical cases.
Therefore, you have to use differential (calculus) method to determine stops for
revenue, cost, or profit.
Have to use differential (calculus) method to determine stops for revenue, cost, or
profit.

RL TCL VCL Cost

Q production rate

Revenue during a given period,

Were a and b are constants, where a is the intercept and –b is slope.

To maximize the R, we need to know the estimated optimal demand. Differentiate
and find it. Draw the curve. Do we need to check maximizing R? How?

When R is according to
And
At BEP, , then
[ ]
BEQ is

For a profit, two conditions:



So, optimal demand

To make sure that profit is maximized, find the second derivatives. …

EX.
Linear relationships Nonlinear relationships
F = 200,000, p = 100-0.001Ø, R = 100Ø-0.001Ø2
p = 100/unit, R = 100Ø, v = 20/units TC = 0.005Ø2 + 4Ø + 200,000
TC = 20Ø + 200,000
Solution: Z = R – TC = 0
For BEP(Q), Z = R – TC = 0 100Ø-0.001Ø2 - 0.005Ø2 - 4Ø - 200,000
Q* = BEP(Q) = 2500 units = 0, So, Q* = BEP(Q) = 2462 units
Ø for max. Profit : Marginal profit = d(z)/dØ
Marginal profit = Contribution / units Qmax occurs at d(Z)/dØ = 0,
= p – v = 80/unit So, Q = 8,000 units
Total contribution is increasing linearly
with respect to Q.
Max Z occurs at Qmax = 10,000 (say it is
the full capacity of the plant)
Q for min. average cost (AC) AC = TC/Q = 0.005Ø + 4 + 200000/Ø
AC = TC/Ø = 20 + 200000/Ø AC is min at d(AC)/dØ = 0
AC is min at Qmax. So, Q = 6,325 units
Ø = 10,000
Ø = 6325
Probability Distribution on Demand:
Assumptions:
1. Demand is normally distributed
2. Demand is the only random variable

To find the probability of breaking even,

P (loss) = P (demand < breakeven) =? 24.51%
P (profit) = P (demand > breakeven) =? 75.49%

15% change demand is less than 5,000 (2) = Std. deviation

describes spread 15% chance demands exceed 11,000

What is the value of sigma ?

Z = (demand - /
Z = no. of standard deviation
For the demand of 11,000 (85% chance) from table you can get the value of
Z 1.04
Or, 1.04 = 11000-8000/
Or, = 2855 units
What is the probability of = 6000 - 8000/2855 = -0.69
The area under the curve of -0.69 = 1 - 0.7549 = 24.5%
So, chance of making profit is 75.49%

Taylor’s Equation in manufacturing/machining a part. Variable cost for

metal cutting operation has four components:
 Cost of labor and the machine while the machine is cutting
 Cost of tool
 Cost of machine and labor while sharp tools are mounted, and
 Cost of labor and machine while the work piece is being loaded and
unloaded.

Where, tc = cutting time/part (min); t = tool life (time a tool can cut before dulling)
(min); sl,m = cost (RM/min) of running machine including labor cost; tdt = time
(min) it takes to put a sharp tool on the machine (downtime for tool change); s t =
cost of one sharp tool; tdw = time (min) to load/unload one work piece (downtime
for work piece change), and; ta = time (min) to adjust or position tool for each work
piece.
Cost id function of process parameters selected for the operation. F. W. Taylor
(father of Industrial Engineering) developed a relationship of cutting speed and
tool life. To reduce the processing time, you have to increase cutting speed. But
higher cutting speed increases tool wears. So, there is a need to determine the
optimum cutting speed at which a cutting toll is operated and the life of tool is
considered. Taylor‟s tool life equation is:

Where, C = cutting speed (ft/min) at which the toll dull after one minute of use; v =
cutting speed (ft/min) at which the process will be operated; t = tool life (min) that
can be expected when the tool is operated at cutting speed, and; n = a constant that
is dependent on the material being cut and the cutting tool material.
Now, length of the cut in a work piece . Therefore, ( )

( ) ( )
Cutting speed, v, is the only variable. For minimization of the
variable cost, differential the equation with respect to v and solve for optimal v that
minimizes the cost of cutting.

( ) ( )

Ex. A 2 ft section of a 3-in diameter 1020 steel part is to be machined using a high-
speed steel tool. Take that C = 225 ft/min; sl,m = RM4/min, st = RM16, n = 0.105,
tdt = 3 min, tdw = 1 min, ta = 2 min, and the feed rate of 0.05 in/rev. The fixed cost
for this operation is assumed to RM5,000. If the price of a unit of the product is
RM12, what will be the break-even quantity?

Assignment
1. For producing a certain product, the fixed cost has been experienced to be
RM10,000.00. Unit variable costs come from two sources, raw materials
RM1.5 and labor RM 0.75. The price is estimated to be RM4.
i. Find the break-even volume (BEQ) and break-even money (BEC)
from a graphical solution.
ii. Find them algebraically.
 iii. Compare and comment on results.

2. Two locations are proposed to deploy workforces of a company. Location A

will use 30,000 hours and each hour has a value of RM30. However the
fixed cost will be RM180,000 and for each hour of deployment, a cost of
RM23 is involved. For location B, the value of an hour would be RM33.50,
fixed cost RM190,000 and relevant deployment costs per hour is RM25.2.
i. Which method of solution you are going to apply in finding the BEQ
or BEC for this problem?
ii. Which location can generate more profit for the company?
iii. Determine the break-even hours of both locations and the relevant
costs.

3. Proposals from two suppliers to a manufacturing plant are as below (table)

Supplier I Supplier II
Fixed cost = 50,000 Fixed cost = 70,000
Variable cost/unit = Variable cost/unit =
12.00 10.00
Price = 20.00 Price = 20.00

i. Determine the break-even points for each supplier (BEQ and BEC).
ii. If both suppliers are going to make the same amount of profit, what would
be amount of supply.
iii. Calculate the amount of profit, if Q = 8,500 units. Which proposal should be
chosen?
iv. What-if Q = 15,000 units.
v. If the variable costs are reverse and all other data remain same, what would
be the decision in terms of BEQ and BEC?

4. For producing a product, given that F = RM250,000.00, v = RM20.00 and p

= 30.00
i. What would be the BEQ or BEC?
ii. If the profit is expected to be 10,000.00, what quantity must be
produced.
iii. If a top manager is going to take a salary of RM50,000 per year, then
what would be the fixed cost? New BEP?
5.
, v = 1000.00/unit and F = 10,000 per period.
i. Find BEP(Q) and BEP(C/R). Comment on the result(s).
ii. What should be the quantity to be produced to maximize profit?
Compare the BEP(Q) result and this quantity and make any
reasonable comment.

6. When
i. What is the profit function?
ii. What is quantity you must produce to maximize profit?
iii. What is the BEP(Q)?
iv. Find the quantity to be produced to maintain the average cost. Make
comment on acceptable result.