I. DEFINITION OF ENGINEERING ECONOMICS V.

PROBLEM 1

Engineering economics is a branch of economics that Annual mileage = 18000

applies economic principles and methods to the analysis and Repair shop = every 3000 miles
evaluation of engineering projects. It helps engineers to make Manual = every 6000 miles
decisions about the optimal use of resources, such as materials, Oil & filter change cost = 33
labor, time, and money, to achieve the desired goals and objectives.
Engineering economics also considers the economic feasibility, ? = money saved if service is performed every 6000 miles
profitability, and sustainability of engineering solutions
Solution:

II. PRINCIPLES OF ENGINEERING ECONOMICS Repair chop cost:

18000mi/3000mi = 6
 Develop the alternatives 6 x $33 = $198
 Focus on the differences
 Use a consistent viewpoint Manual suggestion cost:
 Use a common unit of measure 18000mi/6000mi = 3
 Consider all relevant data 3 x $33 = $99
 Make risk and uncertainty explicit
 Revisit your decision $198 - $99 = $99

Therefore, the customers can save about $99 dollars’ worth of

III. ECONOMIC ANALYSIS PROCEDURES
 Problem recognition, definition, and evaluation
 Development of feasible alternatives
 Development of the outcomes and cash flows for each
alternative
 Selection of criterion
 Analysis and comparison of alternatives
 Selection of preferred alternative
 Performance monitoring and post evaluation of results
IV. NOMINAL GROUP TECHNIQUE VS CLASSICAL
BRAINSTORMING
Nominal Group Technique involves a larger group of
participants who work together to generate, reduce, rank, and agree
on the best ideas. Classical Brainstorming involves a smaller group
of participants who work individually or in pairs to generate as many
ideas as possible without judging or criticizing them.
service if they follow the car manual’s suggestion compared to the
repair shop’s recommendation
VI. PROBLEM 2
a. Problem Definition: The problem is to determine the most cost-
effective and efficient method for producing a newly designed drill
bit, given the constraints of budget, time, and environmental
considerations.
b. Key Assumptions:
- The old machine can be modified to meet production
requirements.
- McDonald Inc. will deliver the new machine on time.
- The budget set aside for the start-up is sufficient.
c. Alternatives:
- Modify the existing machine in-house.
- Have McDonald Inc. modify the existing machine.
- Purchase a new machine from McDonald Inc.

d. Evaluation Criterion: The alternatives will be evaluated based on

cost-effectiveness, time to readiness, and environmental impact.

e. Risk Factors:
- In-house technicians may not be able to modify the machine as
they have never done this type of modification before.
- The old machine's cooling system is not environmentally safe.
- McDonald Inc. might not deliver the new machine on time.
f. Nonmonetary Considerations: IX. PROBLEM 5
- Environmental impact: The old machine's cooling system is not Given:
environmentally safe. Oil mileage increase = 1%
- Reputation: Dependence on an external company (McDonald Assuming annual mileage = 50000 miles
Inc.) might affect Greenfield Industries' reputation. Without Dynolube
Gasoline cost = $4.00
g. Post audit: This could involve reviewing the actual costs and Ave. car mileage = 20mi/gal
benefits after a certain period of operation, comparing them with the
projected costs and benefits, and analyzing any discrepancies to Dynolube cost = $19.95
improve future decision-making processes.
a.) Without Dynolube:
50000mi/20mipg = 2500 gal
VII. PROBLEM 3 2500 gal x $4.00 = $10,000

a. Sunk Cost are those that have occurred in the past and has With Dynolube:
no relevance to estimates…… 20mpg x 1.01 = 20.2 mi
b. Opportunity Cost are incurred because of the use of limited 50000 mi/20.2 mpg = 2475.2475 gal
resources...... 2475.2475 gal x $4.00 = $9900.99
c. Fixed Cost are unaffected by changes in activity level over
a feasible range of operations……. $10000 – $9900.99 = $99.01
d. Variable Costs, in total, change in relation to the quantity of
output or other measures of activity level $99.01 saved with the use of dynolube
e. Incremental Costs refers to the additional costs that will
result from increasing…… b.) Since dynolube is a one-time additive
f. Recurring Costs are those that are repetitive and occur $99.01 - $19.95 = $79.06
when goods or services……..
g. Direct Costs can be reasonably measured and allocated to Therefore, it would be financially beneficial to use this
a specific output…… product in your automobile.
h. Nonrecurring Costs are not repetitive even though the total
expenditure may be cumulative……. X. PROBLEM 6

VIII. PROBLEM 4 a.) Given:

10,000 item
a. Opportunity Cost of Buying a New Car: The opportunity Fixed price = $ 8.50
cost of buying a new car is the potential return you could
have earned by investing the money either in the high-tech 10,000 x $8.50 = $85,000 total cost
firm’s common stock or in the three-year certificate of
deposit at the local bank. In other words, it’s the forgone b.) Given:
potential earnings from these investments. 10,000 items
Direct Materials = $5.00
b. Opportunity Cost of Investing in High-Tech Common Stock: Direct Labor = $1.50
The opportunity cost of investing in the high-tech common Overhead = $3.00
stock is the certain return you could have earned by putting
the money into a three-year certificate of deposit with a ($5.00 + $1.50 + $3.00) x 10,000 = $95,000 total cost
local bank or the utility you could have derived from buying
a new car. It’s the forgone potential earnings from the Based on these calculations, it would be more cost-effective to
certificate of deposit or the enjoyment from the new car. purchase the items as it would save the company around $10,000
compared to manufacturing the items.