Engineering Economics

(HM421)

Engineering Costs and Cost

estimating
Chapter 2
 Engineering Costs
- Classification of Costs
 Fixed - constant, unchanging
 Rent is constant, Equipment cost
 Variable - depend on activity level
 Labor cost depend upon number of employees in factory
 Marginal - variable cost for the next unit
 Cost of producing one more unit of Fan
 Average - Average cost per unit
 total cost/number of units

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Engineering Costs
- Example 2-1

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 Engineering Costs
- Example 2-1
Fixed Costs Variable Costs
Bus Rental $ 80.00 Event Tickets $ 12.50
Gas Expense $ 75.00 Refreshments $ 7.50
Other Fuels $ 20.00 Total costs
Bus Driver $ 50.00
Total FC $ 225.00 Total VC $ 20.00 $700.00
$600.00
$500.00

Cost ($)
$400.00 Total cost
$300.00 Fixed cost
People Fixed cost Variable cost Total cost $200.00
0 $ 225.00 $ - $ 225.00 $100.00
$-
5 $ 225.00 $ 100.00 $ 325.00 0 5 10 15 20
10 $ 225.00 $ 200.00 $ 425.00
15 $ 225.00 $ 300.00 $ 525.00 Volume
20 $ 225.00 $ 400.00 $ 625.00

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Engineering Costs
- Example 2-2

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Engineering Costs
- Example 2-2

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 Engineering Costs
- Profit and Loss
 Breakeven: total revenue = total costs
 Just getting own money back
 Profit region: total revenue > total costs
 Putting money in the bank
 Loss region: total revenue < total costs
 Going into debt

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 Engineering Costs
- Profit and Loss
 Profit-loss breakeven chart for Example 2-1 and 2-2

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 Engineering Costs
- Sunk Costs and Opportunity Costs
 Sunk cost: money spent due to a past decision. We
cannot do anything about these costs.
 Purchase price paid for a car two years ago
 Opportunity cost: a benefit that is foregone by
engaging a resource in a chosen activity instead of
engaging that same resource in some foregone activity.
We make a choice or decision.
 Buying lunch instead of gas

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 Engineering Costs
- Recurring and Non-Recurring Costs
 Recurring Costs: anticipated and occur at regular
intervals.
 Purchasing food, paying rent
 Non-Recurring Costs: one-of-a-kind event that occurs
at an irregular interval.
 Illness, accident, death

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 Engineering Costs
- Recurring and Non-Recurring Costs
 Recurring Costs: anticipated and occur at regular
intervals.
 Purchasing food, paying rent
 Non-Recurring Costs: one-of-a-kind event that occurs
at an irregular interval.
 Illness, accident, death

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 Engineering Costs
- Incremental Costs
 An incremental cost is the difference between the costs
of two alternatives.

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Engineering Costs
- Example 2-4
 Philipis choosing between model A (a budget model)and
model B (with more features and a higher purchase
price). What incremental costs would Philip incur if he
chose model B instead of the less expensive model A?
Costs
Model
Incremental
Cost Items A B
Purchase price $ 10,000.00 $ 17,500.00 $ 7,500.00
Installation costs $ 3,500.00 $ 5,000.00 $ 1,500.00
Annual maintenance costs $ 2,500.00 $ 750.00 $(1,750.00)
Annual utility expenses $ 1,200.00 $ 2,000.00 $ 800.00
Disposal costs after useful life $ 700.00 $ 500.00 $ (200.00)

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 Engineering Costs
- Cash and Book Costs
 Cash costs: movement of money from one owner to
another - also known as a cash flow.
 Payment this month on an auto loan
 Book cost: cost of a past transaction that is recorded in a
book.
 Down payment recorded in your checkbook from last year’s
automobile purchase

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 Engineering Costs
- Life Cycle Costs
 Life Cycle: all the time from conception to death of a
product (process).
 Life Cycle Costs: Total of all the costs incurred during
the life cycle.
 Life Cycle Costing: designing with an understanding of
all the costs associated with a product during its life-
cycle.

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Engineering Costs
- Typical Life Cycle

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Engineering Costs
- Life Cycle Costs

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Engineering Costs
- Life Cycle Costs

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 Engineering Costs and Cost Estimating
- Summary
 Donald G. Newnan, et al., “Engineering Economic
Analysis,” 9th Edition, Oxford University Press (Read
Chapter No 2)

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