Engineering

Engineering is a profession in which the knowledge of

mathematical and sciences gained by study, experience and practice is
applied with judgment to develop ways to utilize, economically the
material and forces of nature for the benefit of mankind.

Economics

The word ‘economics’ comes from two Greek words, “eco”

meaning home
and “ nomos” meaning accounts. Economics is the social science that
studies how individuals, organizations and societies manage the scarce
resources under their control foe the satisfaction of their needs and
desires. Economics is all about making choices.

Engineering Economy

Engineering economics, is the subset of economics concern with

the use and application of economics principles in the analysis of
engineering decisions. It studies the behaviour of individual and firms in
making decision regards the allocation of limited resources.
A job description for an engineer consists of two words: problem solver.
Engineers use knowledge to find new ways of doing things
economically. Every problem has multiple solutions. Engineering
economy provides a systematic framework for evaluating the economic
aspects of competing design solutions. Engineering is more than a
problem-solving activity focusing on the development of products,
systems, and processes to satisfy a need or demand. Design decisions
affect limited resources such as time, material, labour, capital, and
natural resources.
Cost Concepts and
Design Economics

Cost Terminology

There are a variety of costs to be considered in an engineering

economic analysis. These costs differ in their frequency of occurrence,
relative magnitude, and degree of impact on the study.

Fixed Cost

Fixed costs are those costs that are unaffected by changes in

activity level over a feasible range of operations for the capacity or
capability available. Typical fixed costs include insurance and taxes on
facilities, general management and administrative salaries, license fees,
and interest costs on borrowed capital.
Fixed costs tend to remain constant over a specific range of
operating conditions. When larger changes in usage of resources occur,
or when plant expansion or shutdown is involved, fixed costs can be
affected.

Variable Costs.

Variable costs are those associated with an operation that varies

in total with the quantity of output or other measures of activity level. For
example, the costs of material and labour used in a product or service
are variable costs, because they vary in total with the number of output
units.

Incremental Cost
 An incremental cost is the additional cost that results from
increasing the output of a system by one (or more) units. Incremental
cost is often associated with “go–no go” decisions that involve a limited
change in output or activity level.

Direct Costs

Direct costs are costs that can be reasonably measured and

allocated to a specific output or work activity. The labour and material
costs directly associated with a product, service, or construction activity
are direct costs. For example, the materials needed to make a pair of
scissors would be a direct cost.

Indirect Costs

Indirect costs are costs that are difficult to allocate to a specific

output or work activity. For example, the costs of common tools, general
supplies, and equipment maintenance in a plant are treated as indirect
costs.
Overhead consists of plant operating costs that are not direct
labour or direct material costs. Examples of overhead include electricity,
general repairs, property taxes, and supervision. Administrative and
selling expenses are usually added to direct costs and overhead costs to
arrive at a unit selling price for a product or service.

Standard Costs

Standard costs are planned costs per unit of output that are
established in advance of actual production or service delivery. They are
developed from anticipated direct labour hours, materials, and overhead
categories. Standard costs play an important role in cost control and
other management functions.
Cash Cost.

A cost that involves payment of cash is called a cash cost.

Book Cost

Book costs are costs that do not involve cash payments but rather
represent the recovery of past expenditures over a fixed period of time.
The most common example of book cost is the depreciation charged for
the use of assets such as plant and equipment.

Sunk Cost

A sunk cost is one that has occurred in the past and has no
relevance to estimates of future costs and revenues related to an
alternative course of action. Suppose that Joe College finds a
motorcycle he likes and pays $40 as a down payment, which will be
applied to the $1,300 purchase price, but if he decides not to take the
cycle. Over the weekend, Joe finds another motorcycle he considers
equally desirable for a purchase price of $1,230. For the purpose of
deciding which cycle to purchase, the $40 is a sunk cost and thus would
not enter into the decision.

Opportunity Cost

An opportunity cost is incurred because of the use of

limited resources, such that the opportunity to use those resources to
monetary advantage in an alternative use is foregone. Thus, it is the
cost of the best rejected (i.e., foregone) opportunity and is often hidden
or implied.
Consider a student who could earn $20,000 for working
during a year, but chooses instead to go to school for a year and spend
$5,000 to do so. The opportunity cost of going to school for that year is
$25,000: $5,000 cash outlay and $20,000 for income foregone.
Life-Cycle Cost

In engineering practice, the term life-cycle cost is often

encountered. This term refers to a summation of all the costs related to
a product, structure, system, or service during its life span. The life cycle
begins with identification of the economic need or want and ends with
retirement and disposal activities.

Investment cost

The investment cost is the capital required for most of the

activities in the acquisition phase. This cost is also called a capital
investment.

Operation and maintenance cost (O&M)

Operation and maintenance cost (O&M) includes many of

the annual expense items associated with the operation phase of the
life cycle. The direct and indirect costs of operation associated with the
five primary resource areas—people, machines, materials, energy, and
information—are a major part of the costs in this category.

Disposal cost

Disposal cost includes those costs of shutting down the operation

and the retirement and disposal of assets at the end of the life cycle.
Normally, costs associated with personnel, materials, transportation, and
one-time special activities can be expected. These costs will be offset in
some instances by receipts from the sale of assets with remaining
market value.

The General Economic Environment

There are numerous general economic concepts that must be taken into
account in engineering studies. In broad terms, economics deals with
the interactions between people and wealth, and engineering is
concerned with the cost-effective use of scientific knowledge to benefit
humankind.

Consumer Goods Services

The goods and services that are produced and utilized may be
divided conveniently into two classes. Consumer goods and services are
those products or services that are directly used by people to satisfy
their wants. Food, clothing, homes, cars, television sets, haircuts, opera,
and medical services are examples.

Producer Goods And services

Producer goods and services are used to produce consumer

goods and services or other producer goods. Machine tools, factory
buildings, buses, and farm machinery are examples.

Necessities, Luxuries

Goods and services may be divided into two types: necessities

and luxuries. Obviously, these terms are relative, because, for most
goods and services, what one person considers a necessity may be
considered a luxury by another. For example, a person living in one
community may find that an automobile is a necessity to get to and from
work. If the same person lived and worked in a different city, adequate
public transportation might be available, and an automobile would be a
luxury.
Q NO 1:- Classify each of the following cost items as mostly fixed or
variable:

Raw materials Administrative salaries

Direct labour Payroll taxes

Depreciation Insurance (building and

Supplies equipment)

Utilities Clerical salaries

Property taxes Sales commissions

Interest on borrowed Rent

Money

Q NO 2:- Stan Money maker needs 15 gallons of gasoline to

top off his automobile’s gas tank. If he drives an extra eight miles
(round trip) to a gas station on the outskirts of town, Stan can save $0.10
per gallon on the price of gasoline. Suppose gasoline costs $3.90 per
gallon and Stan’s car gets 25 mpg for in-town driving.
Should Stan make the trip to get less expensive gasoline?
What other factors (cost and otherwise) should Stan consider in his
decision making?

Q NO 3:- Studies have concluded that a college degree is a very good

investment. Suppose that a college graduate earns about 75% more
money per hour than a high-school graduate. If the lifetime earnings of a
high-school graduate average $1,200,000, what is the expected value of
earning a college degree?

Q NO 4:- Automobile repair shops typically recommend that their

customers change their oil and oil filter every 3,000 miles. Your
automobile user ’s manual suggests changing your oil every 5,000–
7,000 miles. If you drive your car 15,000 miles each year and an oil and
filter change costs $30, how much money would you save each year if
you had this service performed every 5,000 miles?

Q NO 5:- Often it makes a lot of sense to spend some money now so

you can save more money in the future. Consider filtered water. A high-
tech water filter cost about $60 and can filter 7,200 ounces of water. This
will save you purchasing two 20-ounce bottle of filtered water every day,
each costing $1.15. The filter will need replacing every 6 months. How
much will this filter save you in a year ’s time?

Q NO 6:-The manufacturer of Brand A automobile tires claims that

its tire can save 110 gallons of fuel over 55,000 miles of driving,
as compared to a popular competitor (Brand B). If gasoline costs $4.00
per gallon, how much per mile driven does this tire save the customer
(Brand A versus Brand B)?

Competition

Perfect competition occurs in a situation in which any given

product is supplied by a large number of vendors and there is no
restriction on additional suppliers entering the market. Under such
conditions, there is assurance of complete freedom on the part of both
buyer and seller.

Monopoly

Monopoly is at the opposite pole from perfect competition. A

perfect monopoly exists when a unique product or service is only
available from a single supplier and that vendor can prevent the entry of
all others into the market. Under such conditions, the buyer is at the
complete mercy of the supplier in terms of the availability and price of
the product. Perfect monopolies rarely occur in practice, because.

The Total Revenue Function

The total revenue, TR, that will result from a business venture
during a given period is the product of the selling price per unit, p, and
the number of units sold, D. Thus,

TR=Price × Demand =p . D

Cost, Volume, and Breakeven Point Relationships

Fixed costs remain constant over a wide range of activities, but variable
costs vary in total with the volume of output . Thus, at any demand D,
total cost is

CT = CF + CV
where CF and CV denote fixed and variable costs, respectively. For the
linear relationship assumed here,
C V =C v . D

where C v is the variable cost per unit. In this section, we consider two
scenarios for finding breakeven points.

At breakeven point D1 total revenue is equal to total cost, and an

increase in demand will result in a profit for the operation. Then at
optimal demand, D¿profit is maximized [Equation (2-10)]. At breakeven
point D2 total revenue and total cost are again equal, but additional
volume will result in an operating loss instead of a profit. Obviously, the
conditions for which breakeven and maximum profit occur are our
primary interest. First, at any volume (demand), D,

Profit (loss) = total revenue − total costs

total revenue = total costs (Breakeven point)

Q No 7:- A company produces an electronic timing switch that is
used in consumer and commercial products. The fixed cost (C F) is
$73,000 per month, and the variable cost (cv) is $83 per unit. The
selling price per unit is p = $180 − 0.02(D). For this situation,
determine the optimal volume for this product and confirm that a profit
occurs (instead of a loss) at this demand.

Solution :
p = $180 − (0.02)D

C F =¿$73,000

C V =¿ $83D

T c =C F +C v

T c =$ 73,000+ $ 83 D

T R =p . D

T R =(180−0.02 D) D

T R =180 D−0.02 D2

Profit=T R −T c

Profit=180 D−( 0.02 ) D2−($ 73,000+ $ 83 D)

Profit=180 D−( 0.02 ) D 2−73,000−83 D¿

 Profit=97 D−( 0.02 ) D 2 −73,000

dprofit
=97−0.04 D
dD
For extreme value
dprofit
=0
dD

97−0.04 D=0

97=0.04 D

97
=D
0.04

(a) D=2,425units

(b) Profit=97 (2425)−( 0.02 ) ( 2425 )2−73,000

Profit=235225−117612.5−73,000

Profit=$ 44612.5

Q No 8:- A large wood products company is negotiating a contract to

sell plywood overseas. The fixed cost that can be allocated to the
production of plywood is $800,000 per month. The variable cost per
thousand board feet is $155.50. The price charged will be determined by
p = $600 − (0.05)D per 1,000 board feet.
(a) For this situation, determine the optimal monthly sales volume
for this product
(b) Calculate the profit (or loss) at the optimal volume.

Solution :
p = $600 − (0.05)D

C F =¿$800,000

C V =¿ $155.50D

T c =C F +C v

T c =$ 800,000+$ 155.50 D

T R =p . D

T R =(600−( 0.05) D) D

T R =600 D−( 0.05) D 2

Profit=T R −T c

Profit=600 D−( 0.05 ) D2−( $ 800,000+ $ 155.50 D)

Profit=600 D−( 0.05 ) D 2−800,000−155.50 D ¿

Profit=444.5 D−( 0.05 ) D 2−800,000

 dprofit
=444.5−0.1 D
dD

For extreme value

dprofit
=0
dD

444.5−0.1 D=0

444.5=0.1 D

444.5
=D
0.1

D=4,445 units

Profit=444.5(4445)−( 0.05 )( 4445 )2−800,000

Profit=1975802.5−987901.25−800,000

Profit=$ 187901.25

Q No 9:- A large company in the communication and publishing

industry has quantified the relationship between the price of one of its
products and the demand for this product as Price = 150 − 0.01 ×
Demand for an annual printing of this particular product. The fixed costs
per year (i.e., per printing) = $50,000 and the variable cost per unit =
$40.
(a) What is the maximum profit that can be achieved if the
maximum expected demand is 6,000 units per year?
 (b) What is the unit price at this point of optimal demand?

Solution:
p = $150 − (0.01)D

C F =¿$50,000

C V =¿ $40D

T c =C F +C v

T c =50,000+40 D

T R =p . D

T R =(150−0.01 D) D

T R =150 D−(0.01) D2

Profit=T R −T c

Profit=150 D−( 0.01 ) D2−($ 50,000+ 40 D)

Profit=150 D−( 0.01 ) D 2−50,000−40 D

Profit=110 D−( 0.01 ) D 2 −50,000

 dprofit
=110−0.02 D
dD

For extreme value

dprofit
=0
dD

110−0.02 D=0

110=0.02 D

110
=D
0.02

D=5500 units

Profit=110 (5500)−( 0.01 ) (5500 )2−50,000

Profit=$ 252500

p = $150 − (0.01)5500

p = $95

Q No 10:- A company produces and sells a consumer product and is

able to control the demand for the product by varying the selling price.
The approximate relationship between price and demand is
 2700 5000
P =38+ D − 2
D

where p is the price per unit in dollars and D is the demand per month.
The company is seeking to maximize its profit. The fixed cost is $1,000
per month and the variable cost (cv) is $40 per unit.

(a) What is the number of units that should be produced and sold
each month to maximize profit?
(b) Show that your answer to Part (a) maximizes profit

Q No 11:- A lash adjuster keeps pressure constant on engine valves,

thereby increasing fuel efficiency in automobile engines. The relationship
between price (p) and monthly demand (D) for lash adjusters made by
the Wicks Company is given by this equation: D = (2,000 − p)/0.10.
(a) What is the demand (Dˆ) when total revenue is maximized?
What important data needed if maximum profit is desired?

Q No 12:- An electric power plant uses solid waste for fuel in the
production of electricity. The cost Y in dollars per hour to produce
electricity is TC = 12 + 0.3X + 0.27X2 , where X is in megawatts.
Revenue in dollars per hour from the sale of electricity is TR=15X −0.2x
2
. Find the value of X that gives maximum profit.
 Assigment 1

Q NO 1:- Classify each of the following cost items as mostly fixed or

variable:

Raw materials Administrative salaries

Direct labour Payroll taxes

Depreciation Insurance (building and

Supplies equipment)

Utilities Clerical salaries

Property taxes Sales commissions

Interest on borrowed Rent

money

Q N0 2:- Stan Money maker needs 15 gallons of gasoline to top

off his automobile’s gas tank. If he drives an extra eight miles (round
trip) to a gas station on the outskirts of town, Stan can save $0.10 per
gallon on the price of gasoline. Suppose gasoline costs $3.90 per gallon
and Stan’s car gets 25 mpg for in-town driving.
Should Stan make the trip to get less expensive gasoline?
What other factors (cost and otherwise) should Stan consider in his
decision making?