ENGINEERING ECONOMICS

KUK2142

Chapter 4
Manufacturing Cost Estimation
 Manufacturing Cost Estimation
 Factors Affecting Cost of Manufacturing (COM)

 Estimating Labour Cost

 Estimating Raw Material Cost

 Yearly Costs and Stream Factors

 Estimating Utility Cost

 Estimating Waste Treatment Cost

 Cost of Manufacturing (COM)
 Before the economic feasibility of a proposed process can be assessed, the costs
associated with the day-to-day operation of a chemical plant must be estimated.
 Manufacturing cost: The sum of costs of all resources consumed in the process of
making a product.
 Manufacturing costs are expressed in units of dollars per unit time ($/yr), in contrast to
the capital costs, which are expressed in dollars ($).
 Factors Affecting Cost of Manufacturing (COM)

Factors affecting COM

Direct Manufacturing Costs Costs which expenses vary with production rate. When product demand
drops, production rate is reduced thus lower the direct manufacturing
costs. e.g raw materials, utilities, operating labor, maintenance.
Fixed Manufacturing Costs Costs which are independent of changes in production rate which are
charged at constant rates even when the plant is not in operation.
e.g. property taxes, insurance, depreciation.
General Expenses Costs represent an overhead burden that is necessary to carry out
business functions. Expenses seldom vary with production level.
e.g. management, sales, financing, research functions.
Factors Affecting Cost of Manufacturing (COM)
 Factors Affecting Cost of Manufacturing (COM)
 Generally, the cost of manufacturing, COM can be determined using:
COM = DMC + FMC + GE
where:
COM = Cost of Manufacturing
DMC = Direct Manufacturing Costs
FMC = Fixed Manufacturing Costs
GE = General Expenses
 Factors Affecting Cost of Manufacturing (COM)

In details, the cost of manufacturing, COM, can be determined when the following
costs are estimated:

1.Fixed capital investment (FCI): (CTM or CGR)

2.Cost of operating labor (COL)
3.Cost of utilities (CUT)
4.Cost of waste treatment (CWT)
5.Cost of raw materials (CRM)
Factors Affecting Cost of Manufacturing (COM)
 Factors Affecting Cost of Manufacturing (COM)
Cost of Manufacturing (COM)
COM = DMC + FMC + GE
DMC = CRM + CWT + CUT + 1.33COL + 0.069FCI + 0.03COM
FMC = 0.708COL + 0.168FCI + depreciation
GE = 0.177COL + 0.009FCI + 0.16COM
COM = 0.280FCI + 2.73COL+ 1.23 (CUT + CWT + CRM)
COMd = 0.180FCI + 2.73COL+ 1.23 (CUT + CWT + CRM) (without depreciation)
The COM can be determined when the following costs are estimated
CTM or CGR : Fixed Capital Investment (FCI)
COL : Cost of Operating Labor
CUT : Cost of Utilities
CWT : Cost of Waste Treatment
CRM : Cost of Raw Materials
 Example
The following cost information was obtained from a design for a 92,000 metric-tonne/year
nitric acid plant. Determine the manufacturing cost, COMd in $/yr and the price of $/tonne of
nitric acid.

Costs
Fixed Capital Investment $ 11,000,000
Raw Material Cost $ 7,950,000/yr
Waste Treatment Cost $ 356,000/yr
Utilities $ 1,000,000/yr
Direct labor Cost $ 300,000/yr
 Estimating Labour Cost (COL)
Operating labor, COL is estimated using:

•where NOL is the number of operators per shift,

•P is the number of processing steps involving the handling of particulate solids
•Nnp is the number of nonparticulate processing steps and includes compression, heating
and cooling, mixing, and reaction. In general, the value of P is zero.
•Nnp is given by
 Estimating Labour Cost (COL)
• A single operator works on the average 49 weeks a year with five 8-hour shifts a week.
This amounts to (49 weeks/year × 5 shifts/week) 245 shifts per operator per year.
• A chemical plant normally operates 24 hours/day. This requires (365 days/year ×
• 3 shifts/day) 1095 operating shifts per year.
• The number of operators needed to provide this number of shifts is [(1095 shifts/y)/(245
shifts/operator/y)] or approximately 4.5 operators.
• 4.5 operators are hired for each operator needed in the plant at any time.
 Example
Estimate the operating labor requirement and costs for the production of benzene shown in
PFD below.
 Yearly Costs and Stream Factors (SF)
 Manufacturing and associated costs are most often reported in Yearly Costs ($/y).

 Flowrates in a PFD is most often reported in terms of kg/hr or kg/s.

 In order to calculate the yearly cost of raw materials or utilities, the fraction of time that
the plant is operating in a year must be known. This fraction is known as the stream
factor (SF). Typical values of the stream factor are in the range of 0.96 to 0.90.

Stream Factor (SF) = Number of Days Plant Operates per Year

365

Yearly Costs = (Yearly flowrate)(SF)(Cost of materials or utilities per unit

mass)
 Estimating Material Cost (CRM)
 Raw Materials - are resources that will be made into finished products.
 The cost of raw materials can be estimated by using the most current price data.
 The cost of raw material generally fluctuate due to many factors, and some might vary
with seasonal pricing trend. Thus, it is advisable to look at average price over a period of
several months.
 When doing economic evaluations for new, existing, or future plants, it is advisable to
establish the true selling or purchase price for all raw materials and products.
 Because the largest operating cost is nearly always the cost of raw materials, it is
important to obtain accurate prices if realistic economic evaluations are to be obtained.
Estimating Material Cost
 Example
Given the production of benzene in Figure 1.1 where the plants operated 347 days per year
and the costs of toluene and benzene are $0.919/kg and $1.033/kg, respectively. Determine:
a)Yearly cost of toluene for the benzene production ($/yr)
b)Yearly revenue of benzene ($/yr)
 Estimating Utility Cost (CUT)
Utilities can be supplied in a number of ways:

1. Purchasing from a Public or Private Utility: In this situation no capital cost is involved,
and the utility rates charged are based upon consumption.
2. Supplied by the Company: A comprehensive off-site facility provides the utility needs for
many processes at a common location. In this case, the rates charged to a process unit
reflect the fixed capital and the operating costs required to produce the utility.
3. Self-Generated and used by a Single Process Unit: In this situation the capital cost for
purchase and installation becomes part of the fixed capital cost of the process unit.
 Estimating Utility Cost (CUT)
 The utility cost estimated is the cost associated with the operating costs to generate the
utility.
Estimating Utility Costs from the PFD
 Utilities do not directly contact process streams.
 In most cases, the related amount/flowrate can be found by inspection or by doing
energy balance around the equipment involved.
Utilities purpose Equipment involved

Exchange heat energy (fuel gas, steam, Heat exchangers and process
cooling water, and boiler feed water) heaters
Supply work (electric power or steam) Pumps, compressors, and other rotating
equipment.
 Estimating Utility Cost (CUT)
 Utility streams such as cooling water and steam for heating are shown on the PFD.
These streams, termed utilities, are necessary for the control of stream temperatures as
required by the process.
Estimating Utility Cost (CUT)
Estimating Utility Cost (CUT)
 Estimating Utility Cost (CUT)
Utilities Equipment Energy balance
Steam Preheater/heat Q = (ṁsteam)(ΔHvap)
exchanger
Yearly Cost = (Q)(Cost steam per unit energy)(SF)
or
Yearly Cost = (Yearly ṁsteam flowrate)(Cost steam per unit mass)
(SF)
Cooling Water Cooler/heat Q = (ṁcw)(Cpcw)(ΔTcw)
exchanger
Yearly Cost = (Q)(Cost cooling water per unit energy)(SF)
or
Yearly Cost = (Yearly ṁcw flowrate)(Cost cooling water per unit
mass) (SF)
Fuel (Fuel oil, Heater Q = (ⱱgas )(ΔHnatural gas)(efficiency)
natural gas)
Yearly Cost = (Q)(Cost fuel per unit energy)(SF)
or
Yearly Cost = (Yearly ⱱgas volume) )(Cost fuel per unit volume)(SF)
 Estimating Utility Cost (CUT)
Utilities Equipment Energy balance
Electricity Compressor (electric- Electric Power (Pdr) = Shaft power/ξdr
drive)
Yearly Cost = (Pdr) )(Cost electricity)(SF)

Pump Electric Power (Pdr) = Shaft power/ξdr

Yearly Cost = (Pdr)(Cost electricity)(SF)

Steam Compressor (steam- Table 8.5 provides a steam requirement kg steam/kWh of
drive) power.

ṁsteam required by drive = (Shaft power)(steam

requirement per power/ξdr)

Yearly Cost = (Yearly ṁsteam required by drive) (Cost

steam per unit mass)(SF)
Estimating Utility Cost
 Example
Given the production of benzene in Figure 1.3 where the plants operated 347 days per year.
Estimate the quantities and yearly costs of the utilities (steam, cooling water, fuel, electricity,
steam for deriving electricity) for the equipment below:

a) E-101, Feed Preheater

b) E-102, Reactor Effluent Cooler
c) H-101, Heater
d) C-101, Recycle gas Compressor, assuming electric drive
e) C-101, Recycle gas Compressor, asuming steam drive using 10 barg steam
discharging to atmospheric pressure (0 barg)
f) P-101, Toluene Feed Pump
Example
Example
 Estimating Waste Treatment Cost
 As environmental regulations continue to tighten, the problems and costs associated with
the treatment of waste chemical streams will increase.
 Although waste minimization will become increasingly important in the future, the need to
treat waste streams will continue.
 Some typical costs associated with this treatment are given in charges table and
flowrates can be obtained from the PFD.
Estimating Utility Cost
 Estimation of Cost of Manufacturing (COM)
Given the production of benzene in Figure 1.3 where the plants operated 347 days per year
when the fixed capital investment (CGR) for the process is found to be $12.5 × 106. Calculate
the cost of manufacture without depreciation (COMd).
Items Yearly cost

FCI (Fixed Capital Investment) CTM or CGR = $12.5 × 106

CUT (Cost of Utilities) Steam = $3,412,000/y

CRM (Cost of Raw Materials)
CWT (Cost of Waste Treatment)
Cooling Water = $165,000/y
Fuel Gas = $2,771,000/y
Electricity = $37,400/y
Total Utilities = $6,385,000/y
Toluene = $85,967,000/y
Hydrogen = $6,622,000/y
Total Raw Materials = $92,589,000/y
Waste Treatment = $0.0/y

COL (Cost of Operating Labor) Operating Labour = (14)(59,580) = $834,000/y