K.

15 RP 2015-2016
ECONOMIC ANALYSIS
COST ANALYSIS (PETERS & TIMMERHAUS)

Total Production Cost (TPC):

1. Manufacturing Cost (MC)
2. General Expense (GE)
TPC = MC + GE

Total product cost

Manufacturing cost General costs

(or administration costs or
overhead)

Direct costs Fixed costs

Materials

Labour

Energy

Indirect costs Administration

Distribution

Other Depreciation DevelopmentAccounting

Insurance

Operating

Air

Catalysis and Interest on

supervision

Electricity
Fuel

solvents
Interest on

General overheads Clerical wages

Sales offices

Health Cummulative Salesmen salaries

invesment

Inspection

and expenses

Maintenance Laboratories Transportation

Refrigeration working capital

Rates, rent,

Steam Laboratories and taxes

Plant superintendent

Vacuum

Advertising

Packaging

Technical sales
service

Maintenance Recreation
Packaging

Research

Royalties

Restaurant
Safety
Salvage
Storage
Waste handling

Manufacturing Cost (MC):

a. Direct Production Cost (DPC)
b. Fixed Charge (FCh)
c. Plant Overhead Cost (POC)
MC = DPC + FCh + POC

Total product cost

( + mark-up = sales price)

Manufacturing cost

General costs
(or overheads
or Administration)

Direct costs

Indirect costs Fixed costs

Fig. 1
Typical generalised breakdown of costs
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a. Direct Production Cost (DPC)

1) Raw Materials (10-50% TPC)
2) Operating Labour (OL = 10-20% TPC)
3) Direct Supervision & Clerical Lab (10-25% OL)
4) Utility (10-20% TPC)
5) Maintenance & Repair (MR = 2-10% FCI)
6) Operating Supplies (10-20% MR, 0.5-1% FCI)
7) Laboratory Charge (10-20% OL)
8) Patent & Royalties (0-6% TPC)
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Fixed Capital Investment (FCI):

(1). Direct Cost (DC)
(2). Indirect Cost (IDC)
FCI = DC + IDC

(1). Direct cost (DC)

A.Equipment, Installation, Instrumentation, Piping,
Electrical, Insulation, Painting (50-60% FCI)
1.Purchase equipment cost (PEC = 15-40% FCI)
2.Installation, insulation, painting (25-55% PEC)
3.Instrumentation & control (6-30% PEC)
4.Electrical installation (10-40% PEC)
5.Piping (10-80% PEC)
B.Building, process, & auxilliary (10-70% PEC)
C.Service facility & yard improvement (40-100% PEC)
D.Land (1-2% FCI, 4-8% PEC)

(2). Indirect cost (IDC)

a)Technical & supervision (5-30% DC)
b)Construction & contractor (6-30% DC)
c) Contingency (5-15% FCI)

b.
Fixed

Charge (FCh)
i. Depreciation
ii. Local taxes (1-4% FCI)
iii.Insurance (0.4-1% FCI)

c. Plant Overhead Cost (POC)

POC = 50-70% OL supervision
maintenance or 5-15% TPC

&
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Total Capital Investment (TCI)

TCI = FCI + WC
Working Capital (WC)
WC = 10-20% TCI

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General Expense (GE)

A.Administrative
Cost
(15%
OL
supervision & maintenance, or 2-6%
TPC)
B.Distributing & Selling Cost (2-20% TPC)
C.Research & Development (2-5%,
depend on dollar, or 5% TPC)
D.Financing (0-10% TCI)
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Reliability study
1. Profitability
2. POT
3. ROR
4. DCF-ROR
5. Net profit
6. BEP
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Profitability (ACF)
- Selling

Price

- TPC
- Net Profit Before Tax
- Tax (30%)
- Net Profit After Tax
- Depreciation
- Annual Cash Flow
If 100% > i% (bank rate) reliable
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POT
POT
= , years.
If POT < service life reliable.
Calculating POT:
Yea
r

TCI
(loan)

Interest

Total loan

ACF
(payment)

Loan
left

(1)

(2)

(3)

(4)

(5)

(6)

TCI

i%(TCI)

TCI + i%(TCI)

ACF

(4)1
(5)1

(4)1
(5)1

i%(2)2

(2)2 + (3)2

ACF

(4)2
(5)2

(4)2
(5)2

i%(2)3

(2)3 + (3)3

ACF

(4)3
(5)3

(4)3 (5)3 + i

(4)3 (5)3 + i

(4)3

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ROR
ROR = 100%
If ROR > i% reliable
DCF-ROR,
is the interest of TCI that every year will give ACF for the
whole service life and will give WC and SV by the end of
service life.
or
DCF-ROR is the interest of TCI that the present value of ACF
for the whole service life and of WC and SV at the end of
service life, is the same as TCI.
Equation for calculating DCF-ROR, i% is:

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Net Profit:
1.Net Profit Over Total Life of the Project (NPOTLP)
2.Total Capital Sink (TCS)
NPOTLP = the profit after payment of TCI without
interest
=Cummulative Cash Position (CCP) + Capital
Recovery (CR)
CCP = sum of ACF for the whole service life minus
TCI
= ACF TCI
CR = Working Capital (WC) + Salvage Value (SV) +
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TCS
TCS = profit after payment of TCI and its
interest
= ACF (TCI + interest of TCI)
= ACF - payment of TCI and its
interest
If TCS > TCI reliable
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Break Even Point (BEP),

shows the percentage of production
capacity should be operated that all the
modal (TPC) will return (by SP).
or
BEP shows the production capacity when
TPC = SP.
Methods for BEP determination:
1. Graphical method

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Graphical method
1. Draw FC as function of production capacity
2. Draw VC as function of production
capacity
3. Draw TPC as function of production
capacity with TPC = FC + VC
4. Draw SP as function of production capacity
5. Intersection of TPC and SP gives BEP
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Mathematical method
Use

the equation:
BEP = 100%

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