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Chapter # 15 Solutions - Engineering Economy, 7 TH Editionleland Blank and Anthony Tarquin
Chapter # 15 Solutions - Engineering Economy, 7 TH Editionleland Blank and Anthony Tarquin
Chapter 15
Cost Estimation
15.1 Ranking most time to least time: detailed estimate, design 60-100% complete, partially
designed, order of magnitude, scoping/feasibility.
15.2
Supplies: AOC
Insurance: AOC
Equipment cost: FC
Utility cost: AOC
Installation: FC
Delivery charges: FC
Labor cost: AOC
15.3 Calculate taxes (A), make bids (E), pay bonuses (A), determine profit or loss (A),
predict sales (E), set prices (A), evaluate proposals (E), distribute resources (E), plan
production (E), and set goals (E)
15.4 Bottom-up: Input = cost estimates; Output = required price
Top-down: Input = competitive price; Output = cost estimates
15.5 Project staff (D), Audit and legal (I), Utilities (I), Rent (I), Raw materials (D), Equipment
training (D), Project supplies (D), Labor (D), Administrative staff (I), Miscellaneous office
supplies (I)
15.6 License plate (indirect), Drivers license (indirect), Gasoline (direct), Highway
toll fee (indirect, since it is usually an option to choose a non-toll route), Oil change
(direct), Repairs after collision (indirect), Gasoline tax (direct, since it is a part of the
direct cost of gas, Monthly loan payment (indirect), Annual inspection fee (indirect),
Garage rental (indirect).
15.7 Conceptual design stage estimates are called order-of magnitude estimates and
they should be within 20% of the actual cost.
15.8 Cost = 120(58.19) = $6983
15.9 Cost = 600(4700) = $2,820,000
15.10 Estimated cost = 496(6000)
= $2,976,000
15.11 Cost = 1,350,000(1.70/0.93)
= $2,467,742
15.12 Cost/volume = 185/[(1ft2)(10 ft)] = $18.50 ft3
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15.18 From Table 15-3, index value in 2001 = 6343; index value in mid-2010 = 8837
Ct = 30,000,000(8837/6343)
= $41,795,680
15.19 To have index value of 100 in year 2000, must divide by 62.21.
(a) New index value in 1995 = 5471/62.21
= 87.9441
(b) New index value in 2009 = 8570/62.21
= 137.7592
15.20 (a) First find the compounded percentage increase p between 1995 and 2005.
7446 = 5471 (F/P,p,10)
1.36099 = (1+p)10
p = 0.0313 or 3.13 % per year
40,000 = 21,771(F/P,2.68%,n)
40,000 = 21,771(1 + 0.0268)n
1.83731 = (1.0268)n
log 1.83731 = n(log 1.0268)
n = 23
Year = 2010 - 23
= 1987
= $20,245
(b) Cost = 4100[(1700/900)0.67
= $6278
15.30 C2 = 13,000(500/4)0.37
= $ 77,589
15.31 C2 = 58,890(2/0.75)0.58 = $104,017
15.32 Use the six-tenths model; exponent = 0.60
1.52C1 = C1(68/30)x
log 1.52 = x log 2.267
x = 0.51
C2 = 0.942C1 = C1(2)x
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CT = (1 +1.32 + 0.45)(870,000)
= $2,409,900
15.42 First find direct cost; then multiply by indirect cost factor:
h = 1 + 1.28 + 0.23 = 2.51
CT = [243,000(2.51)](1.84)
= $1,122,271
15.43 2,300,000 = (1 + 1.35 + 0.41)CE
CE = $833,333
15.44
(b)
Basis Level
2800/1.40 = 2000
3400/1.33 = 2556
3500/1.37 = 2555
3600/1.03 = 3495
6000/0.9 = 6522
Basis__________
Space
Direct labor costs
Direct labor costs
Space
Material costs
(b) The only way the rate could decrease is by switching the allocation basis from month
to month. If a single allocation basis had been used throughout, the rate would have
had to increase for each basis. For example, if space had been used for each month,
the monthly rates would have been:
Month
February
March
April
May
June
Rate_________
2800/2000 = $1.40 per ft2
3400/2000 = $1.70 per ft2
3500/3500 = $1.00 per ft2
3600/3500 = $1.03 per ft2
6000/3500 = $1.71 per ft2
15.50 Determine AW for Make and Buy alternatives. Make has annual indirect costs.
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Hand solution:
Make: Indirect cost computation
Dept
Sylvester
Laurel
7th St
Spicewood
190
55
38
104
(b) Station ID
Sylvester
Laurel
7th St
Spicewood
Number of pumps
5
7
3
4
19
190(981.91) = 186,563
55(981.91) = 54,005
38(981.91) = 37,313
104(981.91) = 102,119
$380,000
Allocation at $20,000/pump____
100,000
140,000
60,000
80,000
$380,000
Rate
$17.544/$
645.16/work-hr
714.29/work-hr
Percent
change
+ 4.15%
+16.5
-29.7
Guests
A
3500
Charge, $ 212,135
B
4000
242,440
Site_____________
C
D
8000
1000
484,880
60,610
Guest-nights
Charge, $
A
10,500
297,885
Site_________________
B
C
D__
10,000
10,000
4750
283,700
283,700 134,757
(c) The actual indirect charge to sites C and D are significantly different by the 2
methods. Another basis could be guest-dollars, that is, total amount of money a guest
spends.
15.57 Answer is (c)
15.58 Answer is (b)
15.59 Answer is (d)
15.60 Cost = 2100(200/50)0.76
= $6022
Answer is (a)
15.61 Cost = 500,000(5542.16/3378.17)
= $820,290
Answer is (c)
15.62 Cost = 3000(500/250)0.32(1449.3/1061.9)
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= $5111.23
Answer is (d)
15.63 3,000,000 = 550,000(100,000/6000)x
5.4545 = (16.67)x
log 5.4545 = xlog(16.67)
x = 0.60
Answer is (d)
15.64 CT = 2.96(390,000) = $1,154,400
Answer is (c)
15.65 CT = (1 + 1.82 + 0.31)(650,000)
= $2,034,500
Answer is (a)
15.66 Answer is (d)
15.67
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DLH basis
Standard:
Premium:
Model
IDC
rate
Standard
Premium
$ 8.91
26.64
2.
DLH
hours
IDC
allocation
0.25/un $ 2.23/un
0.50
13.32
Direct
material
Direct
Labor
2.50/un
3.75
Activity
Cost
Driver
Volume
of driver
Total
cost/year
Quality
Purchasing
Scheduling
Prod. Set-ups
Machine Ops
Inspections
Orders
Orders
Set-ups
Hours
20,000
40,000
1,000
5,000
10,000
$800,000
1,200,000
800,000
1,000,000
1,200,000
$ 5/un
10
Total
cost
$ 9.73/un
27.07
Price,
~1.10
cost__
$10.75/un
29.75
ABC
IDC rate
$40/inspection
30/order
800/order
200/set-up
120/hour
ABC allocation
Driver
_____Standard__________
Volumerate IDC allocation
Quality
8,00040
$320,000
Purchasing 30,00030
900,000
Scheduling
400800
320,000
Prod. Set-ups 1,500200
300,000
Machine Ops. 7,000120
840,000
Total
$2,680,000
Sales volume
IDC/unit
________Premium_________
Volumerate IDC allocation
12,00040
10,00030
600800
3,500200
3,000120
$480,000
300,000
480,000
700,000
360,000
$2,320,000
750,000
250,000
$3.57
$9.28
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3.
Model
Direct
material
Direct
labor
Standard
Premium
2.50
3.75
5.00
10.00
IDC
allocation
3.57
9.28
Total
cost
$11.07
$23.03
Traditional
Model
Profit/unit
Standard
Premium
Profit
Volume
Profit__
750,000
250,000
$765,000
670,000
$1,435,000
750,000
250,000
$ 240,000
1,680.000
$1,440,000
ABC
Standard
Premium
Profit
4.
Cost
Price
Profit/unit
Volume
Profit___
Standard
Premium
Profit
$11.07
23.03
$12.18
25.33
$1.11
2.30
750,000
250,000
$832,500
575,000
$1,407,000
a) Prediction about IDC allocation - The manager was right on IDC allocation under
ABC, but totally wrong on traditional where the cost is ~ 1/3 and IDC is ~1/6.
Model
Standard
Premium
_______Allocation__________
Traditional
ABC___
$2.23/unit
$3.57/un
13.32
9.28
b) Cost versus profit comment Wrong, if old prices are retained. Under ABC method,
the standard model loses $0.32/unit. Price for standard should go up.
Premium model makes a good profit at current price under ABC (29.75-23.03 =
$6.72/unit).
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