NE364

Engineering Economy
COST CONCEPTS AND DESIGN ECONOMICS (SHEET 1)

ENG. MARWAN EL‐SABROUTY
Cost Terminologies
 𝐶 = 𝐶 + (𝐶 *D)
TR=P*D • 𝑪𝑻 : Total Costs
Profit = TR‐ 𝐶 • 𝑪𝒗 : 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
• 𝑪𝑭 : 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
• 𝑫: 𝐷𝑒𝑚𝑎𝑛𝑑
• 𝑻𝑹: 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
• 𝑷: 𝑃𝑟𝑖𝑐𝑒
Breakeven Analysis
Scenario #1:Price Constant 
Total Revenue = Total Costs
• 𝑪𝑻 : Total Costs
 TR = 𝐶 • 𝑪𝒗 : 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
 P*D = 𝐶 + 𝐶 *D • 𝑪𝑭 : 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
 P*D  ‐ 𝐶 *D = 𝐶 • 𝑫: 𝐷𝑒𝑚𝑎𝑛𝑑
 D * (P‐ 𝐶 ) = 𝐶 • 𝑻𝑹: 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
 D’ = • 𝑷: 𝑃𝑟𝑖𝑐𝑒
• 𝑫’:Demand at BEP
Breakeven Analysis
Scenario #2:Price Variable 
Total Revenue = Total Costs Price (p)
 TR = 𝐶
 P*D = 𝐶 + 𝐶 *D P= a ‐ b D
 (a‐bD)*D  = 𝐶 ‐ 𝐶 *D 
 aD ‐ 𝑏𝐷 = 𝐶 ‐ 𝐶 *D 
 aD ‐ 𝑏𝐷 ‐ 𝐶 ‐ 𝐶 *D = 0
 ‐𝑏𝐷 +(a‐ 𝐶 )*D‐𝐶 = 0 Demand (D)
a Is the intercept at the price axis
b Is the slope
P Is the selling price per unit 
D Is the demand 
 Maximum Profit 
(not necessarily at max revenue)

CT

Cost / Revenue
Profit Total Revenue

Quantity ( Output )
D’1 D* D’2 Demand
D’1 and D’2 are breakeven points

Profitable Range
Therefore,

𝐚 𝐂𝐕
Max profit : 𝐃∗
𝟐𝐛

𝐚
Max Revenue: 𝐃
𝟐𝐛

6
Question 1 
A plant has a capacity of 4,100 hydraulic pumps per month. The fixed cost is $504,000 per month. 
The variable cost is $166 per pump, and the sales price is $328 per pump. (Assume that sales 
equal output volume.) What is the breakeven point in number of pumps per month? What 
percentage reduction will occur in the breakeven point if fixed costs are reduced by 18% and unit 
variable costs by 6%? 

Givens:
CF=$504,000/month
Cv=$166/pump
P=$328/pump
Break‐even point occurs when Profit = 0

TR = TC
p * D’ =CF + cv * D’
D’ = CF/ (p – cv)
D’=3111.1 =3,112 pumps/month

If : 
CF decreased by 18%   CFnew =504000(1‐0.18)= $413,280/month
Cv  decreased by 6%     Cvnew= 166(1‐0.06)= $156.04/pump
D’new = CFnew/ (p – Cvnew)= 41328/328‐156.04= 2403.33 =2,404 units
The percentage reduction in breakeven point= 100*(D’new ‐ D’)/ D’
=100*(2404‐3112)/3112 = ‐ 22.75%
Question 2 
An amusement park faces large fixed costs of $500,000 per month and low average variable costs
of $10 per visitor. It charges all visitors a flat entry fee of $50 for unlimited rides.

A. What is the breakeven point for the park?

B. The park currently has 42,000 visitors a month and proposes to raise its entry fee to $60 per
person in order to cover the cost of a new Harry Potter‐themed ride. What is the new
breakeven point if the variable cost increases to $15 per visitor?

C. If the park now receives 25,000 visitors a month because of the increase in entrance fee in
Part (b), will the park still be profitable?
Givens:
• CF=$500,000
• Cv=$10/visitor
• P=$50

Solution

A.  Break‐even point occurs when Profit = 0 B. Number of visitors= 42,000

TR = TC Pnew = $60 , Cvnew = $15

D’new= 500000/(60‐15) = 11111.11 = 11,112 visitors

p * D’ =CF + cv * D’

D’ = CF/ (p – cv) C. The number of current visitors are greater than D’new ,

D’=500000/(50‐10)=12,500  Visitors then the park will still be profitable

Question 4 
A Company produces circuit boards used to update outdated computer equipment. The fixed
cost is $42,000 per month, and the variable cost is $53 per circuit board. The selling price per
unit is p=$150 – 0.02D. Maximum output of the plant is 4,000 units per month.

A. Determine Optimum demand for this product .

B. What is the maximum profit per month?

C. At what volumes does breakeven occur?

D. What is the company’s range of profitable demand?

Givens:
• CF=$42,000 / month
• Cv=$53/month
• P=$150 – 0.02D
• Max Output= 4,000 units/month

Solution C.    Volumes Breakeven Occur Between 𝐷 , 𝐷′

A. D*= ∗ .
2425 units⁄month

B. Max Profit, so we substitute with D*

𝐷′ 480.671 ≅ 481 𝑢𝑛𝑖𝑡𝑠
Profit =‐bD +(a‐ C )*(D‐C

= $75,612.5/month 𝐷′ 4369.3 ≅ 4,369 𝑢𝑛𝑖𝑡𝑠

Assignment 
solve question 5 and submit it on moodle
Due Date 14/3/2021