Al-Azhar University Mechanical Engineering Department

Faculty of Engineering 4th Year – Engineering Economy

Costing

1. As a manager of El-Nagah Company, you were asked to determine the selling price of a new product.
Information available shows that:

Direct material cost per unit is 3 LE. Direct labor cost per unit is 1.5 LE.

The total value of equipment used for production is 1,000,000 LE to be depreciated over 10 years.

The market study showed that the annual sales volume is 100,000 units. The general overhead of the
company is 25% of the direct cost. The general policy of the company is to realize 20% profit over the
total cost.

2. A manager is trying to decide whether to purchase a certain part or to have it produced internally. Internal
production could use either of two processes. One would entail a variable cost of 17 LE per unit and an
annual fixed cost of 20,000 LE, the other would entail a variable cost of 14 LE per unit and an annual
fixed cost 20,400 LE. Three vendors are willing to provide the part. Vendor A has a price of 20 LE per
unit for any volume up to 30,000 units. Vendor B has a price of 22 LE per unit for demand 1,000 units or
less, and 18 LE per unit for large quantities. Vendor C offers a price of 21 LE per unit for the first 1,000
units, and 19 LE per unit for additional units.

If the manager expects an annual volume of 10,000 units, which alternative would be best from cost stand
point? For 20,000 units, which alternative would be best?

3. As a general manager of the Eternal Happiness Company you were asked to determine the selling price of
a new product. You gathered the following data from different departments:

a. Material cost 2 LE/unit

b. Machine cost 1,000,000 LE
c. Economic life of machines 10 years
d. Labor cost:
Production 0.10 LE/unit
Supervision 5,000 LE/month
e. Power consumption:
Machines 50 LE/hr
Light 10 LE/hr
f. Production rate 1,000 units/shift (1shift = 8 hr’s)
g. Department overhead 20% of direct cost

Page 1
Al-Azhar University Mechanical Engineering Department
Faculty of Engineering 4th Year – Engineering Economy
Costing

h. Company’s general overhead 40% of all other costs

i. Net profit 20%
j. Taxes 40% of gross profit

4. A company is considering the production of a new product. Production department estimated the cost of
production as follows:
a. Material cost is 10 LE/unit.
b. Product is produced on one machine that costs 100,000 LE/unit. The economic life of the
machine is 5 years.
c. Machining time of one unit is 20 minutes.
d. Labor cost is 20 LE/unit.
e. Production overhead is 25% of the production cost.
f. Unit of production is kilogram.

The taxes are 40% of the gross profit. Sales cost is 0.50 LE/unit. The policy of the company is to realize
20% profit over total cost. If the general overhead of the company is 30% what should be the selling price
that meet the policy of the company?

5. Justin, a ME with Dynamic Casting, has asked to make a preliminary estimate of the total cost to
manufacture 1,500 sections of high-pressure gas pipe using an advanced centrifugal casting method.
Since a ±20% estimate is acceptable at this preliminary stage, a unit method estimate is sufficient. Use the
following resource and unit cost factor estimates to help Justin.
 Materials: 3,000 tons at $45.90 per ton
 Machinery and tooling: 1,500 hours at $120 per hour
 Direct labor in plant:
o Casting and treating: 3,000 hours at $55 per hour
o Finishing and shipping: 1,200 hours at $45 per hour
 Indirect labor: 400 hours at $75 per hour

Page 2
Al-Azhar University Mechanical Engineering Department
Faculty of Engineering 4th Year – Engineering Economy
Costing

6. The cost of operating a jet-powered commercial (passenger-carrying) airplane varies as the

/
three-halves (3/2) power of its velocity; specifically, = , where n is the trip length in miles, k
is a constant of proportionality, and v is velocity in miles per hour. It is known that at 400 miles per hour
the average cost of operation is $300 per mile. The company that owns the aircraft wants to minimize the
cost of operation, but that cost must be balanced against the cost of passengers’ time ( ), which has been
set at $300,000 per hour.
a. At what velocity should the trip be planned to minimize the total cost, which is the sum of the
cost of operating the airplane and the cost of passengers’ time?
b. How do you know that your answer for the problem in part (a) minimizes the total cost?

Dr. Tarek Nasreldeen

Page 3