ENGINEERING ECONOMICS

CHAPTER I – INTRODUCTION TO ENGINEERING ECONOMY

I. LESSON TITLES

1. Engineering Economy Defined

2. Principles of Engineering Economics
3. Engineering Economics and the Design Process
4. Cost Concepts for Decision Making
5. Present Economic Studies

II. LESSON OVERVIEW

This lesson deals with the definition of Engineering Economics, the Design Process of
Engineering Economics, Cost Concepts for Decision Making and the Present Economic Studies.

III. DESIRED LEARNING OUTCOMES

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

1. Learn and Understand the definition of Engineering Economics;

2. Learn and Understand the Principles of Engineering Economics;
3. Learn and Understand the Design Process of Engineering Economics and its
terminologies;
4. Learn and Understand the Cost Concepts for Decision Making in Engineering Economics;
and
5. Be aware and know the present economic studies.

IV. LESSON CONTENT

1. ENGINEERING ECONOMY/ECONOMICS DEFINED

As defined by Arreola

Engineering economy is that branch of economics which involve the application of definite
laws of economics, theories of investment and business practices to engineering problems involving
cost.
It is also defined to be the study of economic theories and their application to engineering
problems with concept of obtaining the maximum benefit at the least cost as a basis for decision.
It also involves the study of cost features and other financial data and their application in the
field of engineering as a basis for decision.

As defined by Kasner

Engineering economics is equated with practicality and economic feasibility. It is also the
search for the recognition of alternatives which are then compared and evaluated in order to come
up with the most practical design and creation.

As defined by Sullivan, et al.

Engineering economy is the systematic evaluation of the economic merits of proposed

solutions to engineering problems.

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2. PRINCIPLES OF ENGINEERING ECONOMICS

Terminologies

Consumer and Producer Goods and Services

Consumer goods and services are those products or services that are directly used by people to
satisfy their wants.
Producer goods and services are used to produce consumer goods and services or other
producer goods.

Necessities and Luxuries

Necessities are those products or services that are required to support human life and activities
that will be purchased in somewhat the same quantity even though the price varies considerably.
Luxuries are those products or services that are desired by humans and will be purchased if
money is available after the required necessities have been obtained.

Demand, Competition, Monopoly and Oligopoly

Demand is the quantity of a certain commodity that is bought at a certain price at a given place
and time.
Elastic demand occurs when a decrease in selling price result in a greater than
proportionate increase in sales
Inelastic demand occurs when a decrease in the selling price produces a less than
proportionate increase in sales.
Unitary elasticity of demand occurs when the mathematical product of volume and
price is constant.

Perfect Competition occurs in a situation where a commodity or service is supplied by a

number of vendors and there is nothing to prevent additional vendors entering the market.

Monopoly is the opposite of perfect competition. A Perfect monopoly exists when a unique
product or service is available from a single vendor and that vendor can prevent the entry of all others
into the market.

Oligopoly exist when there are so few suppliers of a product or service that action by one will
almost inevitably result in similar action by the others.

The Law of Supply and Demand

Supply is the quantity of a certain commodity that is offered for sale at a certain price at a
given place and time.
The Law of Supply and Demand may be stated as “Under conditions of perfect competition
the price at which a given product will be supplied and purchased is the price that will result in the
supply and the demand being equal.”

The Law of Diminishing Returns

“When the use of one of the factors of production is limited, either in increasing cost or by
absolute quantity, a point will be reached beyond which an increase in the variable factors will result
in a less than proportionate increase in output.”

Important Uses of Engineering Economy

1. Seeking new objectives for the application of engineering – An important use of engineering
economy is to seek new objectives for engineering application. Engineers are constantly seeking

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new and wider application of their technical knowledge for the benefit of mankind and in line with
this, engineering economy provides basic principles and laws.

2. Discovery of factors limiting the success of a venture or enterprise – upon knowing the
objectives, next is to determine ways and means to attain such objectives. With Engineering
Economy the so-called limiting factors which may hinder the success of a project are being
discovered.

3. Comparison of alternatives as a basis for decision – The principles of engineering economy

helps to point out the analysis of choosing the best alternatives on a quantitative basis.

4. Analysis of possible investment of capital – Engineering economy enables engineers to

consider all aspects of investment from both the technical and financial viewpoints. It provides
several patterns of analysis to determine rate of return, annual costs and pay out periods, which all
serves as bases for decision.

5. Determination of bases for decision – Engineers‟ main concern is on future actions, that is on
what to do and not on what has been accomplished. Decisions on future actions are more valid and
accurate if the principles of engineering economy are correctly applied.

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 Origins of engineering economy. A civil engineer named Arthur Wellington in the later part
of the 19th century made use of engineering economic analysis in building railroads in the U. S. In
1930, Eugene Grant published his book, Principles of Engineering Economy, which emphasized on
techniques that depended on financial and actuarial mathematics.

Principles of Engineering Economy

Principle 1. Develop the alternatives. The choice is among alternatives.

Principle 2. Focus on the differences. Only the difference in expected outcomes is considered.

Principle 3. Use a consistent viewpoint. Prospective outcomes of the alternatives, economic, etc.
should be considered.

Principle 4. Use a common unit of measure. Using a common unit of measurement of the possible
outcomes in comparing alternatives.

Principle 5. Consider all relevant criteria. Consider both monetary and other unit of measure in
measurement of outcomes.

Principle 6. Make uncertainty explicit. Uncertainty is inherent in projecting future outcomes and should
considered in their analysis and comparison.

Principle 7. Revisit your decisions. Projected results and decisions should be compared with actual
results to improved the decision process.

3. ENGINEERING ECONOMICS AND THE DESIGN PROCESS

(Seyyed Khandani, Ph.D., skhandani@dvc.edu, August 2005)

If you take a moment to observe your surroundings, you will see examples of technological
creativity. The physical objects you see, whether they are telephones, automobiles, bicycles, or
electric appliances, all came into being through the creative application of technology. These everyday
inventions did not miraculously appear but originated in the minds of human beings and took time to
develop. Engineering is the creative process of turning abstract ideas into physical representations
(products or systems). What distinguishes engineers from painters, poets, or sculptors is that
engineers apply their creative energies to producing products or systems that meet human needs.
This creative act is called design.

ENGINEERING DESIGN
Most engineering designs can be classified as inventions-devices or systems that are created
by human effort and did not exist before or are improvements over existing devices or systems.
Inventions, or designs, do not suddenly appear from nowhere. They are the result of bringing together
technologies to meet human needs or to solve problems. Sometimes a design is the result of someone
trying to do a task more quickly or efficiently. Design activity occurs over a period of time and requires
a step-by-step methodology.
We described engineers primarily as problem solvers. What distinguishes design from other
types of problem solving is the nature of both the problem and the solution. Design problems are open
ended in nature, which means they have more than one correct solution. The result or solution to a
design problem is a system that possesses specified properties.

Design problems are usually more vaguely defined than analysis problems. Suppose that you
are asked to determine the maximum height of a snowball given an initial velocity and release height.
This is an analysis problem because it has only one answer. If you change the problem statement to
read, "Design a device to launch a 1 -pound snowball to a height of at least 160 feet," this analysis
problem becomes a design problem. The solution to the design problem is a system having specified
properties (able to launch a snowball 160 feet), whereas the solution to the analysis problem consisted
of the properties of a given system (the height of the snowball). The solution to a design problem is
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therefore open ended, since there are many possible devices that can launch a snowball to a given
height. The original problem had a single solution: the maximum height of the snowball, determined
from the specified initial conditions.
Solving design problems is often an iterative process: As the solution to a design problem
evolves, you find yourself continually refining the design. While implementing the solution to a design
problem, you may discover that the solution you've developed is unsafe, too expensive, or will not
work. You then "go back to the drawing board" and modify the solution until it meets your
requirements. For example, the Wright brothers' airplane did not fly perfectly the first time. They began
a program for building an airplane by first conducting tests with kites and then gliders. Before
attempting powered flight, they solved the essential problems of controlling a plane's motion in rising,
descending, and turning. They didn't construct a powered plane until after making more than 700
successful glider flights. Design activity is therefore cyclic or iterative in nature, whereas analysis
problem solving is primarily sequential.
The solution to a design problem does not suddenly appear in a vacuum. A good solution
requires a methodology or process. There are probably as many processes of design as there are
engineers. Therefore, this lesson does not present a rigid "cookbook" approach to design but presents
a general application of the five-step problem-solving methodology associated with the design
process. The process described here is general, and you can adapt it to the particular problem you
are trying to solve.

THE DESIGN PROCESS

The basic five -step process usually used in a problem-solving works for design problems as
well. Since design problems are usually defined more vaguely and have a multitude of correct
answers, the process may require backtracking and iteration. Solving a design problem is a contingent
process and the solution is subject to unforeseen complications and changes as it develops. Until the
Wright brothers actually built and tested their early gliders, they did not know the problems and
difficulties they would face controlling a powered plane.

The five steps used for solving design problems are:

1. Define the problem
2. Gather pertinent information
3. Generate multiple solutions
4. Analyze and select a solution
5. Test and implement the solution

The first step in the design process is the problem definition. This definition usually contains a
listing of the product or customer requirements and specially information about product functions and
features among other things. In the next step, relevant information for the design of the product and
its functional specifications is obtained. A survey regarding the availability of similar products in the
market should be performed at this stage. Once the details of the design are clearly identified, the
design team with inputs from test, manufacturing, and marketing teams generates multiple
alternatives to achieve the goals and the requirements of the design. Considering cost, safety, and
other criteria for selection, the more promising alternatives are selected for further analysis. Detail
design and analysis step enables a complete study of the solutions and result in identification of the
final design that best fits the product requirements. Following this step, a prototype of the design is
constructed and functional tests are performed to verify and possibly modify the design.

When solving a design problem, you may find at any point in the process that you need to go
back to a previous step. The solution you chose may prove unworkable for any number of reasons
and may require redefining the problem, collecting more information, or generating different solutions.
This continuous iterative process is represented in the following Figure.

Define the Gather

Problem Information

ENGINEERING
DESIGN
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 PROCESS
Generate
Test and multiple
implement solution
solution
Analyze
and select and solution

Designing an Automobile Airbag Inflation, Designing a Better Mouse Trap, Designing a

Simplified Sand and Gravel Separator, these are some design problems that needs to be solved using
the five steps in design process.

Define the Problem

You need to begin the solution to a design problem with a clear, unambiguous definition of the
problem. Unlike an analysis problem, a design problem often begins as a vague, abstract idea in the
mind of the designer. Creating a clear definition of a design problem is more difficult than, defining an
analysis problem. The definition of a design problem may evolve through a series of steps or
processes as you develop a more complete understanding of the problem.

a. Identify and Establish the Needs

b. Develop and Problem Statement
c. Establish Criteria for Success

The following is a list of preliminary criteria for a better mousetrap design. This list would be
included in the problem definition statement.
· The design must be low cost.
· The design should be safe, particularly with small children.
· The design should not be detrimental to the environment.
· The design should be aesthetically pleasing.
· The design should be simple to operate, with minimum human effort.
· The design must be disposable (you don't reuse the trap).
· The design should not cause undue pain and suffering for the mouse.

Gather Pertinent Information

· Is the problem real and its statement accurate?

· Is there really a need for a new solution or has the problem already been solved?
· What are the existing solutions to the problem?
· What is wrong with the way the problem is currently being solved?
· What is right about the way the problem is currently being solved?
· What companies manufacture the existing solution to the problem?
· What are the economic factors governing the solution?
· How much will people pay for a solution to the problem?
· What other factors are important to the problem solution (such as safety, aesthetics and
environmental issues)?

Generate Multiple Solution

• Curiosity and tolerance of the unknown. Creative people have a positive curiosity of the unknown.
They are not afraid of what they don't understand.
• Openness to new experiences. Creative people have a healthy and positive attitude toward new
experiences.
• Willingness to take risks. Creative people are not afraid to take risks and try new experiences or
ideas, knowing that they may be misunderstood and criticized by others. They are self-confident
and not afraid to fail.
• Ability to observe details and see the "whole picture." Creative people notice and observe details
relating to the problem, but they also can step back and see the bigger picture.

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• No fear of problems. Creative people are not afraid to tackle complex problems, and they even
search for problems to solve. They seek solutions to problems with their own abilities and
experience if possible. They have the attitude of "if you want something done, you'd better do it
yourself."
• Ability to concentrate and focus on the problem until it's solved. Creative people can set goals
and stick to them until they're reached. They focus on a problem and do not give up until the
problem is solved. They have persistence and tenacity.

Analyze and Select a Solution

· Functional analysis
· Industrial design/Ergonomics
· Mechanical/Strength analysis
· Electrical/Electromagnetic
· Manufacturability/Testability
· Product safety and liability
· Economic and market analysis
· Regulatory and Compliance

Test and Implement the Solution

• Protyping
• Concurrent Engineering
• Documentation
• Applying for Patents
• Testing and Verification
4. COST CONCEPTS FOR DECISION MAKING
(Engineering Economics, by Instructor:Assist. Prof. Dr. Rıfat Gürcan Özdemir)

Fixed / Variable Costs – If costs change appreciably with fluctuations in business activity, they are
“variable.” Otherwise, they are “fixed.”

A widely used cost model is:

Total Costs = Fixed Costs + Variable Costs

Some examples of fixed costs: Insurance, taxes on facilities, administrative salaries, rental
payments and initial setup or installation.

Some examples of variable costs: direct labor, direct material, unit transportation.

Top 9 Cost Concepts used in Decision Making

(Article shared by : Sanskriti Singh)

a. Marginal Cost
Marginal cost is the total of variable costs, i.e., prime cost plus variable overheads. It is based
on the distinction between fixed and variable costs. Fixed costs are ignored and only variable
costs are taken into consideration for determining the cost of products and value of work-in-
progress and finished goods.

b. Out of Pocket Costs

This is that portion of the costs which involves payment to outsiders, i.e., gives rise to cash
expenditure as opposed to such costs as depreciation, which do not involve any cash
expenditure. Such costs are relevant for price fixation during recession or when make or buy
decision is to be made.

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 c. Differential Costs
The change in costs due to change in the level of activity or pattern or technology or process
or method of production is known as differential costs. If any change is proposed in the existing
level or in the existing methods of production, the increase or decrease in total cost as a result of
this decision is known as differential cost.
If the change increases the cost, it will be called incremental cost. If there is decrease in cost
resulting from decrease in output, the difference is known as decremental cost.

d. Sunk Costs
A sunk cost is an irrecoverable cost and is caused by complete abandonment of a plant. It is
the written down value of the abandoned plant less its salvage value. Such costs are historical
which are incurred in the past and are not relevant for decision-making and are not affected by
increase or decrease in volume. Thus, expenditure which has taken place and is irrecoverable in
a situation is treated as sunk cost.
For taking managerial decisions with future implications, a sunk cost is an irrelevant cost. If a
decision has to be made for replacing the existing plant, the book value of the plant less salvage
value (if any) will be a sunk cost and will be irrelevant cost for taking decision of the replacement
of the existing plant.
Sunk costs are not affected by increase or decrease of volume. Examples of such costs
include depreciated fixed assets, development cost already incurred etc.
e. Opportunity Cost
It is the maximum possible alternative earning that might have been earned if the productive
capacity or services had been put to some alternative use. In simple words, it is the advantage,
in measurable terms, which has been foregone due to not using the facility in the manner originally
planned.
It refers to the value of sacrifice made or benefit of opportunity foregone in accepting an
alternative course of action. For example, if an owned building is proposed to be used for a
project, the likely rent of the building is the opportunity cost which should be taken into
consideration while evaluating the profitability of the project.

Some other examples of opportunity cost are as given below:

(i) The opportunity cost of funds invested in a business is the interest that could have been earned
by investing the funds employed in the business somewhere else as in the bank as a fixed
deposit.
(ii) The opportunity cost of using machine to produce a specific product is the earning forgone that
would have been possible if the machine was used to produce some other product.
(iii) The opportunity cost of obsolete material lying in the firm and used for a specific job is the amount
which can be realized by selling the obsolete material as scrap.
Thus, opportunity cost is the measure of the benefit of opportunity foregone.

Illustration 1:
Mr. Das has retired and plans to open a store selling photographic supplies and art materials. He
has made a down payment on a lease for a store for one year. The down payment was Rs.1,500.
An additional payment of Rs.3,000 must be made during the year. If the lease is cancelled by Mr.
Das, the down payment of Rs.1,500 is forfeited.

Operating results for the year have been estimated as follows:

Mr. Das has made no provision for the cost of his own time, considering the business to be an
extension of his hobby. A business friend offers him Rs 6,000 for the use of the store for the year.

Required:
(i) identify the sunk cost in this decisional situation. Also identify the opportunity cost.
(ii) What decision should Mr. Das make based upon his information given?
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Solution:
(i) The sunk cost is the down payment of Rs.1,500 on the lease. This cost cannot be avoided by any
future course of action. The opportunity cost is Rs.6,000 that a business friend has offered for the
use of the store for the year.
(ii) Mr. Das should operate the store and by doing so will have an advantage of Rs.8,600 as shown
below:

Mr. Das is retired and looks upon this activity as a hobby, no charge is made for his own time.
Illustration 2:
Modern Specialties Ltd. is considering the production of a new product line. This product line
can be manufactured with the present equipment, and the only effect that this product line will
have on manufacturing overhead is to increase the cost of supplies and indirect materials by Rs
18,000.
If this product line is not produced, it is estimated that another line can be manufactured and
sold. The other time should contribute additional profit each year of Rs 12,000.

The new product line under consideration should produce the following results each year:

Required:
(i) Identify the sunk costs
(ii) Should Modern Specialties Ltd. produce new product line under consideration?
Show computations. Identify the opportunity cost.

Solution:
(i) All the manufacturing overhead costs with the exception of the supplies and indirect materials are
sunk costs.

The sunk costs are listed below:

(ii) The line presently under consideration should be produced as it has an advantage over the other
line as shown below:

The opportunity cost is the additional net income of Rs 12,000 that can be expected from another
product line.

Illustration 3:
Three different product lines can be produced by Delhi Supply Company with the present
equipment in one of the divisions. The annual depreciation of the equipment is Rs.8,000 and the

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 annual cost of equipment operation is Rs.3,000. These costs will not be affected by the choice of
the product lines.
Product A is expected to yield sales revenue of Rs.46,000 a year with increased cost of
production amounting to Rs.28,000. Product B should yield sales revenue of Rs.34,000 a year
with increased costs of Rs.11,000. Product C should yield sales revenue of Rs.39,000 with
increased costs of Rs.24000.

Required:
(i) Which of the three product lines seem to offer the best profit potential based on information
given? Show computations.
(ii) Identify the sunk costs
(iii) What is the opportunity cost of selecting only the best product line?

Solution:
(i) Product B has the best profit potential as shown below:

(ii) The sunk costs are the depreciation of Rs.8,000 and the annual cost of equipment operation of
Rs.3,000.
(iii) The opportunity cost of selecting the best product line (Product B) is the sacrifice of the advantage
to be derived from the next best product line (Product A).

f. Imputed Costs
Notional costs or imputed costs are those costs which are notional in character and do not
involve any cash outlay, e.g., notional rent charged on business premises owned by the
proprietor, interest on capital for which no interest has been paid.
When alternative capital investment projects are being evaluated it is necessary to consider
the imputed interest on capital before a decision is arrived as to which is the most profitable
project.
The Chartered Institute of Management Accountants, London, defines notional cost as “the
value of a benefit where no actual cost is incurred.” Even though such costs do not involve
any cash outlay but are taken into consideration while making managerial decisions.
Examples of such costs are: notional rent charged on business premises owned by the
proprietor, interest on capital for which no interest has been paid. When alternative capital
projects are being evaluated it is necessary to consider the imputed interest on capital before a
decision is arrived as to which is the most profitable project.

g. Replacement Cost
It is the cost at which there could be purchase of an asset or material identical to that which is
being replaced or revalued. It is the cost of replacement at current market price.

h. Avoidable Cost and Unavoidable Cost

Avoidable costs are those which can be eliminated if a particular product or department, with
which they are directly related, is discontinued. For example, salary of the clerks employed in a
particular department can be eliminated, if the department is discontinued.
Unavoidable cost is that cost which will not be eliminated with the discontinuation of a product
or department. For example, salary of factory manager or factory rent cannot be eliminated even
if a product is eliminated.

i. Relevant Cost and Irrelevant Cost.

A cost that is relevant to a decision is called relevant cost. Past costs are not generally relevant
costs because they are sunk costs or costs already incurred. Thus, the book value of an asset or
depreciation charged in accounts in respect of an asset is not relevant cost. On the other hand,
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 the fall in the resale value of an asset as a result of using it, as also the running expenses incurred
to make use of the asset are relevant costs.
Similarly in the case of materials regularly in use, the relevant cost is its replacement cost and
not the book value or the realizable value. For material that is not in regular use; the realizable
value is the relevant cost. If it is possible to use this non-moving material in place of another
material, the value of the latter for which substitution is made is the relevant cost of the non-
moving material.
The relevant cost of any scarce resource (e.g., labour) is the direct cost of using the resource
plus any contribution earned by that resource on the most profitable alternative use of the
resource. In this sense the relevant cost is the opportunity cost. Generally relevant costs are the
expected future costs relevant to a decision and they differ among different alternatives.

5. PRESENT ECONOMIC STUDIES

When revenues and other economic benefits are NOT present or are constant among all
alternatives, consider only the costs and select the alternative that minimizes total cost per defect-
free unit of product or service output.

SELECTION OF METHOD
Two or more different methods may give the same satisfactory results
Involves selection of the most economical way to accomplish operations
Present economy studies are engineering economic analyses where alternatives for
accomplishing a specific task are being compared over one year or less and the influence of time on
money can be ignored.

SELECTION OF PROCESS*
A bicycle component manufacturer produces hubs for bike wheels. Two processes are
possible for manufacturing, and the parameters of each process are as follows:

Process 1 Process 2
Production Rate 35 parts per hour 15 parts per hour
Daily Production Time 4 hours per day 7 hours per day
Percent of Parts Rejected 20% 9%
Based on Visual Inspection

Assume that the daily demand for hubs allows all defect-free hubs to be sold. Additionally,
tested or rejected hubs cannot be sold.
Find the process that maximizes profit per day if each part is made from $4 worth of material
and can be sold for $30. Both processes are fully automated, and variable overhead cost is charged
at the rate of $40 per hour.

Situations where Present Economy Studies are Involved

Problem 1

SITE SELECTION

Costs relevant to selecting sites must be carefully considered (land cost, construction cost, cost of
available labor, cost of transporting equipment and materials)

Problem 2

PROFICIENCY OF WORKERS

Bear in mind that workers have varying efficiency and proficiency

Worker proficiency can be translated into monetary values

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Problem 3

SELECTION OF DESIGN

The design to be selected must be best suited for the work to be done with particular care being given
to the one which will do the work with the utmost economy.

Problem 4

Rule 1
ECONOMY IN THE UTILIZATION OF PERSONNEL
Only a certain number of personnel will lead to the highest productivity; increasing this number will
not cause a proportional increase in productivity
*SELECTION OF METHOD*
Ocean water contains 0.9 ounce of gold per ton. Method A costs $220 per ton of water
processed and will recover 85% of the metal. Method B costs $160 per ton of water processed and
will recover 65% of the metal. The two methods require the same investment and are capable of
producing the same amount of gold each day. If the extracted gold can be sold for $350 per ounce,
which method of extraction should be used? Assume that the supply of ocean water is unlimited. Work
on this problem on the basis of profit per ounce of gold extracted.

Problem 5
ECONOMY OF TOOL AND EQUIPMENT MAINTENANCE
Consider the costs of acquiring tools and equipment and the costs of maintaining them
MATERIAL SELECTION
Involves selection among materials available that will result in the most economical product and give
the best results.
*SELECTION OF DESIGN*
Two alternative designs are under consideration for a tapered fastening pin. The fastening
pins are sold for $0.70 each. Either design will serve equally well and will involve the same material
and manufacturing cost except for the lathe and drill operations.
Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design
B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating
cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including
labor, is $16.90 per hour. Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design
B due to obsolete tooling.
a. Which design should be adopted?
b. What is the annual savings over the other design if 125,000 units are sold each year?
When revenues and other economic benefits are present and vary among alternatives, choose the
alternative that maximizes overall profitability based on the number of defect-free units of a product
or service produced.

Problem 6
*MATERIAL SELECTION*
Either tool steel or carbon steel can be used for the set of tools on a certain lathe. It is necessary to
sharpen the tools periodically. Relevant information for each is shown below:

Carbon Steel Tool Steel

Output at optimum speed 100 pieces/hour 130 pieces/hour
Time between tool grinds 3 hours 6 hours
Time required to change tools 1 hour 1 hour
Cost of unsharpened tools $400 $1200
Number of times tools can be ground 10 5

The cost of the lathe operator is $14.00 per hour, including the tool-changing time during which
he is idle. The tool changer costs $20.00 per hour for just the time he is changing tools. Variable
overhead costs for the lathe are $28.00 per hour, including tool-changing time. Which type of steel
should be used to minimize overall cost per piece?
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V. LEARNING ACTIVITIES

ACTIVITY NUMBER 1.

Personal Information :

Name : _______________________________________________________________________
Home Address : _______________________________________________________
Email address (no bogus) : _____________________ CP No. (active) __________________
If boarding in bambang, Boarding address : ____________________________________________
Name of landlord/landlady : ________________________________________________________

1. What is another term for “perfect competition”?

A. Atomistic competition
B. No-limit competition
C. Free-for-all competition
D. Heterogeneous market
2. Duopoly is a market situation where there is/are:
A. Few sellers and few buyers
B. Few sellers and many buyers
C. Many sellers and few buyers
D. One seller and few buyers
3. Duopsony is a market situation where there is/are:
A. Few sellers and few buyers
B. Few sellers and many buyers
C. Many sellers and few buyers
D. One seller and few buyers
4. Oligopoly exists when there is/are:
A. Few sellers and few buyers
B. Few sellers and many buyers
C. Many sellers and few buyers
D. One seller and few buyers
5. If there are many sellers and few buyers, the market situation is _________ .
A. Duopsony
B. Oligopoly
C. Oligopsony
D. Monopoly
6. If there is only one seller and many buyers, the market situation is ________ .
A. Duopsony
B. Oligopoly
C. Oligopsony
D. Monopoly
7. What is the market situation exist when there are many buyers and many sellers?
A. Perfect competition
B. Oligopoly
C. Oligopsony
D. Monopoly
8. What market situation exists where there is only one buyer and only one seller?
A. Monopsony
B. Monopoly
C. Bilateral monopsony
D. Bilateral monopoly
9. What market situation exists where there are few sellers and few buyers?
A. Oligopoly
B. Oligopsony
C. Bilateral oligopoly
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 D. Bilateral Oligopsony
10. What is a market situation whereby there is only one buyer of an item for which there is no goods
substitute?
A. Monopsony
B. Monopoly
C. Oligopoly
D. Oligopsony
11. What is defined as an entity which makes product, good or services available to buyer or consumer
in exchange of monetary consideration?
A. Seller
B. Manufacturer
C. Producer
D. Buyer or consumer
12. What is considered as the basic consuming or demanding unit of a commodity?
A. Seller
B. Manufacturer
C. Producer
D. Buyer or consumer
13. What refers to the exchange mechanism that brings together the sellers and the buyers of a
product, factor of production or financial security?
A. Mall
B. Market
C. Store
D. Office
14. What refers to the goods and services that are desired by human and will be acquired only after
all the needs have been satisfied?
A. Producer products
B. Consumer products
C. Luxury
D. Necessity
15. What refers to the goods and services that are required to support human life, needs and
activities?
A. Producer products
B. Consumer products
C. Luxury
D. Necessity
16. What are the two classifications of goods and services?
A. Local and imported
B. Raw and finished
C. Consumer and producer
D. Ready-made and made-to-order
17. What is defined as any tangible economic activity that contributes directly or indirectly to the
satisfaction of human want?
A. Services
B. Goods
C. Commodities
D. Goods or commodities
18. What is defined as any tangible economic product that contributes directly or indirectly to the
satisfaction of human want?
A. Services
B. Goods
C. Commodities
D. Goods or commodities
19. What is considered as the standard unit which forms the basis of a country’s domestic money
supply?
A. Monetary unit
B. Currency
C. Foreign exchange
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 D. Cash or check
20. What is defines as the analysis and evaluation of the monetary consequences by using the
theories and principles of economics to engineering applications, designs and projects?
A. Economic Analysis
B. Engineering cost analysis
C. Engineering economy
D. Design cost analysis

VI. ASSIGNMENT
Answer the following questions : (copy the question in a clean bond paper then answer it in your own
handwriting. Encircle the letter of your answer.

ASSIGNMENT NUMBER 1.

Name : __________________________________________

1. What is Engineering Economy?

a. The way we make and use money
b. Goods bought from other country
c. Involves formulating, estimating and evaluating the expected economic outcomes of
alternative designed

2. Why engineering economy is important to engineers?

a. To make decision in purchasing/selling/disposal of material, machines, tools and equipment
b. To decide the most economical/profitable project for industry
c. To determine cost of manufacturing
d. All of the above

3. Concurrent engineering is a systematic approach to the integrated, concurrent design of products

and their related processes, including manufacture and support
a. True b. False

4. All of the following are principles of engineering economy, except :

a. Develop the alternatives
b. Use a common unit of measure
c. Focus on the difference
d. Reconsider all relevant criteria

5. What is the process of developing newer, better things?

a. Innovation b. competition c. market

6. Which word best describes a constraint?

a. Option b. restriction c. opportunity

7. The engineering process begins

a. When you transform new ideas
b. Identifying the need or solution to a problem
c. Creating an advertisement

8. When finding the solution to an engineering problem, there is/are usuallya.

a. Only one possible correct solution
b. Many possible correct solution
c. Very limited number of possible correct solutions

9. A team of engineers is asked to design a scooter for less than $30. They decide that they will only
use recycled materials materials. Which of the following is the team’s constraint?
a. Designed to appeal to kids
b. Cost less than $20 to produce
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 c. Made out of recycled materials

10. Afiyah presented an idea for recycling empty milk cartons to her principal. If she followed the
engineering design process, what was the first step in developing her idea?
a. Communicating the results of the research
b. Creating a prototype
c. Identifying the specific problem

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