* * *CHAPTER ONE

Principles ofEngineeHng Economy and Present Economy Studies

1.1 ofEnginæing Emnomy
Engineering economy is that branch of economis that makes use of economic
laws, principles, and to evaluate the value of engineering designs, projece, systems,
produ&, and services. It may also be considered as a process of detemining the
economic factors and principles to be applied to assess the sultabllity of a given
venture, estimate iE wort, and justify it from an engineering perspective.

1.2 Basic
Amortizaton
The gradual repayment of a liabiliti through regular insullmene within a specified period of time.
Such installmenS must be adequate to cover both principal and interest earred.

Authorized Capitl
The grand tobl of and operational capability of a corporation.
ænk Note (Bill)
Paper currency issued by the central bank that is considered the legal tender a county.

Board of Directors
Are tie individuals elected by the stockholders to govem a corporation.

Book Value
The worth of an asset as reflected on a company's balance sheet, it is initial cost less tie
accumulated depreciation.
reak-eæn (no profit or loss)
Is a condition where total sales are equal to tobl cost of production and sales. It is a sib-
mon where no profit is generated and no losses are incurred.

Bum Rate
The rate at which an entity spends money.

Cartel
An organization of companies, countries or other entities that agree to work together to
manipulate market prices by controlling the output and sale of a particular product. The
organization generally prevents tie enby of new players to avoid competition.

Cash inflow my current or expected profit or savings associated with

an investnent.
Cash
Is tie iniåal plus otier projected expenses associated with an invætment.
Execudve Offoer (CEO)
Is the highest ranking corporate exeaJtive who is responsible a company's overall and
paformance, normally the Preident or the OEirman of the Bærd.
Deflation

1-1
 A decrease in the level of national income and output, usually accompanied by a general
decline in prices.

Depletion
A term that refers to the use and exhaustion of natural resources within a region. It is used
in reference to activities such as mining, logging, farming, fishing, and oil exploration.

Depreciation
Decrease in the value of an asset due to deterioration, obsolescence, or passage of time.
Depression
A prolonged state of recession where the gross domestic product (GDP) falls by more than
100/0.ms is characterized by a decline in investments, high unemployment and low wages.
Entity
An organizational unit (a proprietorship, partnership, or corporation) for which accounting
repors are prepared and financial records are kept.

Equity
Is the right, claim, or interest of an entity over the assets of the business.
Exchange Rate
The value of one currency in terms of another.

Expense
COSG incurred for goods and services used in the normal course of business. This excludes goods
bought for resale or any item that is capital nature.
Fixed Assets (Property, Plant, and Equipment)
Any business property acquired for use in operations and which still retains a value at year end.
These usually consist of major items like land, buildings, equipment, and vehicles.

Franchise
A license given to an entity to offer a product or a particular service of the patent holder.
Income (Revenue)
Amount or payment received by an entib/ from business activities.
Inflation
Is tie general increase in the price level of goods and services — a decrease in the purchasing
power of tie peso.
Insolvent
The state of a company if its funds are insufficient to pay all of its obligations.
Joint Venture
A business agreement under which two or more entities join together to undertake a
common project and agree to share tie profits.
Landed costs total costs involved when importing goods. This includes the purchase price,
shipping,

1-2
 A contact frat specifies terms a properti owner agreæ to tan<er tie right of
property use to another parw.

The party tiat is granted right of property' use under terms of a lease.

The owner property tiat is rented (leased) by anotler paty.

Liquidity
The ability of t•te business to meet current obligations witl paymene in ash or otter asseS
an qtÄly converted to cash.

Expense &iat provide no benefit to tie business.

Luxuriæ
Are products or ser,/ices tiat are not essential but are desirable and often e)Qensive,
they are usually brought about by tie conventions and customs of society.
Maker
The prirtipal debtor who assumes reponsibility for the loan payment upon maturity.
Market Value
The price for a property that a willing buyer would pay and a willing seller would accept,
witl in freir own and are under no obligaion to buy or sell.
Maturity Date
The date on whid) a finandal note or offer obligaüon becomes due.
Næssities
Are or services tiat are required to support human life and aåivities, will be in
almost same quantties even if tie prices vary considerably (e.g. basic food, dotting and
shelter).

Overheads
Are tie expenses involved in running a business (e.g. rent, insurance, power, wages,
etc.).
Owner's Equity or Capital
The value of a busines to owner/s. includes the initial investrnent and rebined eamings.
Parent Cornpany
A company that owns or con&ols oåer companies, called subsidiaries. Control generally
refers to ownership of more tetan 50% of tie stock in subsidiary.
Patent
1-3
 An exdusive right granted by tie government for the use, and sale of a specific
product.
Price Dlscrlmlnatlon
The practice of providing the same good or service at different prices to different
consumers, even if production and sales costs are the same for all transactions. Consumers
may be discriminated on the basis of income, gender, age, or geographic location.

Price Transparency

The information process with where no to mediator the both public.seller involved. and the

The buyer term are may accorded also indicate equal the access accessibility to pricingof

pricing information

Price War
A market situation where companies constantly lower prices to weaken the competition or
force smaller competitors out of business.

Profit Margin (Mark — up)

Is the ratio of the difference between the costs of a product and the price it is sold over tie
cost of the product, expressed as a percentage (e.g. if a product costs PIOO and you sell it
for P175 then you have a 75% profit margin).

Pro Rata
A tem describing an allocation based on proportionate distribution of the full amount.

Rate of Return (ROR)

The profit or loss from a financial undertaking, expressed as a percentage of the original
investrnent.

Rebate
The partial retum of the full amount paid for the purchase of a merchandise or
senv'ice.
Recession
A period of economic decline that lasts for a few months, this is usually accompanied
by a drop in the stock market, a decrease in income and an increase in
unemployment.
Refund
The amount returned to a customer for the return of previously purchased products.
Retaind Eamings
Are earnings reinvested in åle business after profit distributions are made to the
owners.
Revenues

1-4
 Income derived from the selling goods or rendering services.

Shareholders (Stockholders)
Are the owners of a company or corporation.
Shares (Stocks)
Refers to documents issued by a company to its owners (the shareholders) indicating
how many shares in the company each shareholder has purchased and what
percentage Of the company the shareholder owns.
Silent Parmer
An investor who does not actively participate in the management or operations Of
the business but provides capGl and shares the liabilities of the company.
Sinking Fund
A resente fund created for the purpose or repaying debt, purchasing new assee or payment of
any other anticipated future expense. The fund is generated by periodically depositing a
cerbin amount in an interest-bearing instrument or investment.

Subsidiary
A company owned or controlled by another known as the parent company.
Subsidy
Economic benefit or financial assistance granted by the govemment to business
entities or individuals usually in the form of a cash payment or tax discounts. A
subsidy is usually given to keep prices stable, maintain employment or encourage
invætrnent.

Sunk Cost
Is a cost that has already been incurred and therefore cannot be changed by any
current decision or action.

Supplies
Materials used in the course of business operations that do not generally become part of the sales
product.

Trading Securities (Markebble Securities)

Are financial purchased wifr the intent of realizing short term income or reselling should
tie need for cash arise.
Transaction
An economic activity between entities tiat involve the transfer of funds or resources.
Transportation
Is the cost of transferring goods into or out of the firm.
Valuation
Tie process of determining the current worü of a particular property for a specific reason.

1.3 Emnomic Conæp& and PHnciples

1-5
1.31 Demand, Supply, and Price
Demand — is the quantity of goods or services that consumers desire and are able to
buy at a specified price at a particular place and time.
Supply — is the total quantiö/ of goods or services that are offered for sale at a specific
price to consumers.
Price — is the amount of payment or compensation given by one entity to another in
exchange for goods or services.

1.32 Law ofDemand

This law explains tie effect price changes have on consumer behavior. The law of
demand states that, "if all other factors are held constant, at lower market prices the demand
for a commodity or service will increase, and demand will decrease at higher market prices".
To clarify, price is considered as a restriction from the viewpoint of the consumer, thus,
people will buy more at lower prices and buy less at higher prices.
1.33 Law ofSupply
The law of supply describes direct relationship bemteen supply, price and the quanåty
supplied. This basic economic principle states that, "if all other factors are held as the price of
a commodity or service increases, then the quantity of the commodity or service that
suppliers are willing and able to sell also increases and vice versa". To explain, when be price
of a commodity increases, suppliers will attempt to maximize profie by increasing the
quantity of their products.

1.34 Law ofSupply and Demand

The law of supply and demand describes the effect that the supply of and be demand
for a particular commodity has on its price. It states, "When the demand is high and the
supply goes down the price will increase. In contrast, when the supply is high and demand
decreases, the price will decrease". Simply explained, when there is a decline in supply, tie
price goes up because there is a shortage; on the other hand, when there is an increase in
supply the price goes down because frere is a surplus.

1.35 Law ofDiminishing Retums

A law of economics that states, if the input of one factor of production is increased
continuously (workers or materials) while holding another factor constant (equipment or
workspace), the marginal output of the variable factor will eventually decrease.

1.36 Market and Business Entity

A market is an organized structure or system used to exchange commodities
(goods, services, or resources) it involves buyers and sellers within a particular area, at
a specified period of time. The following are the most common types of market
structures:

Based on the Supply-Side of the Market:

a. Monopoly — A market characterized by a single supplier of a product or service.
1-6
 b. Oligopoly — A market characterized by a small number of sellers where the action
of one will lead to almost the same acåon of the others.
c. Monopolistic Competition or Semi-monopoly — A market characterized by a large
number of sellers, each with a degree of control over the price.
d. Perfect Competition — A market characterized by a large number of sellers, such
that none is able to control or influence the price.

Based on the Demand-Side of the Market:

a. Monopsony — A market characterized by a single buyer of an item for which there is no
substitute.
b. Oligopsony — A market characterized by a small number of buyers, each with
significant control over the price.
c Monopsonistic Competition — A market characterized by a large number of buyers
having minimal control over the price.

A business entity is a separate economic unit that is distinguished from its owners• It
has ownership and control of its resources and credit arrangements. The following are the
classifications of business entjåes:
According to Ownership:
a. Sole Proprietorship or Single Ownership — is a business entity owned by a
single individual. The owner usually acts as the manager, supplies the
required capital and is responsible for the obligations of the business.
b. Partnership — is a business organization owned by two or more individuals.
This is characterized by a legal agreement between partners specifying
management responsibilities, capital, and the manner in which earnings or
losses shall be distributed.
c. Corporation — is a business organization of not less than five persons. It is an
artificial being created by operation of law, having the rights, powers,
attributes and properties expressly authorized by law. It is an entity separate
from its owners where ownership is represented by transferable shares of
stocks.

According to the Nature of the Business:

a. Servicing — is a business entity that renders services to iE clients or
customers (e.g. rental company, laundry services, motor shops, engineers,
doctors, and lawyers).
b. Merchandising — is a trading or retailing business engaged in the selling of
goods purchased for the purpose of resale. The success of this type of
business depends on ib ability to acquire goods at low prices, and sell the

1-7
 same goods at a profit (e.g. groceries, department stores, and appliance
centers).
c. Manufacturing — is a business entity engaged in the production of the goods that
it sells (e.g. textile manufacturing, brewery, and shoe manufacturing)

1.4 Principles ofEngineering Eønomy

The purpose of engineering economy is to assess the suitability of a given engineering
project and to evaluate related alternatives from an economic standpoint. For every
engineering project, there are usually several potential alternatives. The dificulty of sele&ig one
alternative over others or choosing the do nothing alternative is often encountered. When
making a decision evaluaåon of factors such as co$ revenues, and period of analysis will often
lead to a choice, however, attributes like environmental effect, community development, and
public image must at times be considered. In each analysis it will be useful to consider and be
guided by the following fundamental principles of engineering economy:

PRINCIPLE 1 - IDENTIFY THE ALTERNATIVES

Since the selection is among alternatives, the alternatives need to be recognized,
classified and then defined for further evaluation.

PRINCIPLE 2 - CONSIDER ONLY THE DIFFERENCES

Factors that are common to all alternatives are irrelevant thus, only the differentiating
features between the alternatives should be considered in the analysis.

PRINCIPLE 3 - IGNORE SUNK cosrs

This is a corollary to principle 2, note that sunk costs are cash flows that incurred in
the past; hence, they are factors common to all the alternatives and are immaterial to an
economic choice. Sunk are not considered in an economic analysis since investment and other
financial decisions are based on a series of esumates relating to the future.
PRINCIPLE 4 - ESTABLISH A PERSPECTIVE
The potential worth of the alternatives, economic and otherwise, must be
evaluated from the point of view of the decision maker, which may be that of the owners
of the

PRINCIPLE 5 - USE A COMMON UNIT OF MEASURE

To simplify assessment and comparison of the alternatives a common and practical

unit outcomes of measurement in monetary must terms be or applied. in percentage This

is usually of the rate achieved of return.by expressing the Prospective

PRINCIPLE 6 - REFLECT ON ALL RELEVANT CRITERIA

1-8
 Tie appropriate evaluation all alternative requires the use of a criteria or several
decisive factors. The decision process should consider not only the expected specified
in monetary terms but also those explicitly conveyed as the SUPPIementary objectves
of the project. Non-monetary considerations such as customer satisfaction,
environmental benefits, employee welfare, community improvement, etc., may also
be of compelling importance.

PRINCIPLE 7 - CONSIDER THE UNCERTAINTIES OF THE FUTURE

Because estimates are only predictions, uncertainb/ is inherent in estimating
the future outcomes of alternative choices. However, the type and degree of
uncertainty must be considered in the assessment and comparison of alternatives to
ensure the quality and reliability of the analysis.

PRINCIPLE 8 - RE-D(AMINE YOUR DECISIONS

When a decision is made and the proposal is implemented it is critically important to
follow- up on the project. Actual results should be consistently monitored and subsequently
compared with the projected outcomes of the selected alternative. Evaluation reporb should
be stored in an organized manner and the information generated used to improve future
analyses of alternative selection.

1.5 Engineering Emnomy and the Design Pmæss

Engineering economy studies consists of data gathering and data assessment
between or more alternatives. This is accomplished by integrating the principles of
engineering economy in the economic evaluation of the engineering design process. The
results are then employed in a decision situation to examine which alternative is most
reasonable and which alternative should be given highest priority. As a general rule, an
engineering economy study is a decision-assisting process that involves the following steps:

STEP 1 - PROBLEM DEFINTION

When existing conditions fail to meet our expectations and is requirements,
recognized, it it must is butbe usual to look for its cause or seek improvement. Once the
problem assessed and defined explicitly for easy understanding.

STEP 2 - IDENTIFY ALTERNATIVES

This step requires searching for possible alternatives and screening them to
establish a smaller set of reasonable alternatives (principle 1). This is usually referred to as
the preevaluaåon stage.
STEP 3 - EVALUATE ALTERNATIVES
After preliminary evaluation, the selected set of alternatives is assessed
comprehensibly using time value of money concepts (refer to chapter 2) and related
models of capital allocaüon. This step of the economic analysis also integrates
principles 2, 3, 4, and 5 of section 1.4.

1-9
STEP 4 - DECIDE ON A DECISION CRITERION
The selecion process for the best alternatve requires the use of a specific criterion or
several criteria. This step involves the incorporation of principle 6 of secåon 1.4. fie
economic decision criterion should reflect a constant and appropriate perspecüve
(principle 4) and this must be maintained for the duraüon of the engineering economy
study.

STEP 5 - D(AMINE AND COMPARE ALTERNATIVES

The examination and comparison phase of the study should consider all relevant
criteria when weighing the alternaüves. The comparatve study of the altematives is essentially
based on a cash flow estimates (principle 5), thus a considerable amount of effort is required to
obtain an accurate forecast of projected cash flows. Obviously, uncertainty is inherent in
projecting future outcomes (principle 7); hence, consideration of offer factors such as exchange
rate movement, inflaton, taxes, and depreciaüon should be included in the analysis and
comparison of alternaüves.

STEP 6 - SELECTION, MONITORING AND FOLLOW-UP

After careful study of fre analyäcal resule of step 5 is made the selecton or
implementation of the preferred alternatve follows. With implementation comes
project monitoring and follow-up, the of our choice on the problem or the oppotunity it
generates should be evaluated based on estrnated outcomes. An appropriate recording
system must be established for better analysis and to improve on future engineering
economy studies (principle 8).

1.6 Cost Conæp& for Decision Making

Evaluaion of cost estimates is one of the most tedious and time-consuming part of
an engineering economic study. Alternaive selecton studies in engineering projects must
consider both the explicit (clear and expressed) cose and the implidt (present but
nonapparent) cosE. To develop a better understanding of cost esömates the basic cost
concepb encountered in engineering economic analysis are defined and explained in
this secüon.

fixed Costs
Fixed costs are that are independent of producion or sales output. These
remain constant and must be paid even if the production output is zero. Typical fixed
include rental paymenb, interest payment on loans, management and administraåve
salaries, license fees, and insurance payments.

Variable
Variable are expenses that change in direct proportion with the volume of
or are dependent on the number of sold. Variable include expenses for producton materials,
power, direct labor, and shipping.
1-10
 Recurring
Recurring are that are incurred regularly and repeatedly as a business entity
generates the same services or products on a continuing basis. Rentals, salaries and
variable are considered as recurring

Non-recurring
Non-recurring cosb are non-repetitive and are considered as one-time costs in
engineering proje&. These include the costs for research and design of a project, the cost
of testing a new product, and the cost of real estate property.
Direct Cosb
Direct are expenses directly attributed in the production of goods or the
performance of a service. In the case of manufacturing produ& this is also referred to a
product cost. For the fumiture industry the cost of all the materials and wages of workers
required in the production of tables and chairs is an example of direct cos&
Indirect Costs
Indirect are cose that are not directly related to the manufacture of a product but
are required by the business. These include the expenses for advertising, marketing,
security, maintenance, office supplies and salaries of administrative staff.

Marginal Cost
Marginal cost is defined as the difference in the cost of one more or one less unit
manufactured above or below existing level of production. In this connection, a unit may
represent a single item, a dozen, a pack, a box or any other measure of products. For
example, if a manufacturing firm produces X at a total cost of P50 000.00 and if by
increasing the output by one unit the cost goes up to P50 800.00, the cost of the additional
unit will be P800.OO which is marginal cost.

Standard Cost
Standard cost is a predetermined cost estimated from administrative standards of
eficient operations. These are used as reference for cost control, cost reduction, and budge t
preparation.

Sunk Cost
Sunk cost or embedded cost is an expenditure that was incurred in the past and can
no longer be recovered or retrieved. Hence, it plays no part in estimating any future
revenue or expense in a project. Sunk costs are irrelevant and are usually disregarded in
engineering economic analysis. As an example, assume that you purchase a ticket for the
advance screening of a blockbuster movie, on the date of the showing you are required to
work overtrne to finish a job project. Knowing the importance of meeting the deadline you
are also aware that you will not be able to make it to the movie showing. So you call some
friends to try to sell your ticket but find out they already have or are not interested' Since
the tickeG are non-refundable and it is obvious that you cannot sacrifice your work' then,
the cost of the ucket is considered as a sunk cost.
Opportunity Costs

1-11
 Opportunity cost is the benefit that could have been gained had an alternative action
been considered. For example an opportunity arises for you to invest your money in a
corporate stock but you decide to deposit your money in a bank that guarantees 3%
interest
per year. If at the end of the year the stock pays dividends of 10% then, the opportunity
cost is 7%
Life Cycle Cost
Life cyde cost is the overall or total cost incurred for a project, structure,
equipment or system throughout full life span. This includes cost of acquisition,
operation, maintenance, repairs, conversion and disposal.

1.7 Prænt Emnomy

Present economy studies involve economic analysis that negle& the influence of
irne on the value of money. Investnent decisions and alternative selecüon for such
studies require cost analysis for a period of one (1) year or less, thus, the effe& of
interest, inflaöon and depreciation are considered insignificant.

To recognize such problems, E. Paul Degarmo one of the pioneer authors on the
subject of engineering economy considered the following situations as distincüve to present
economy studies:

1. There is no need for inital capital investment and only operaöng or out-of-pocket
costs are required.
2. There is a need for iniüal capital investment; however, the life-time expenses
shall be constant or directly proportional to the first cost.
3. The disparity of differences in expenses and income generated for alternatives all
occur within a one (1) year period, with any future differences considered as direcdy
proportional to fre first period.

With this, it is evident ttat making decisions based on present economy studies
require only tie basic knowledge of Algebra and common sense - where the rule is to
maximize profit and to minimize cost.

Referenæ:
> DeGarmo, E. P./ Sullivan, W. G./ Bontadelli, J. A./ Wicks, E. M. Engineering Economy,
Ediöon, Prenöce- Hall Internaional Inc., pp. 21-62.
McConnell, C. R.I Brue, S. L./ Flynn, S. M. Economis 8th Ediüon, McGraw-Hill
Companies, pp. 45-62.
Newnan D. G./ Lavelle J. P./ Eschenbach T. G. Engineering Economic Analysis, 9th
Edün, Oxford University Press, pp. 4-18.

1-12
> Sullivan, W. G./ Wicks, E. M.I Luxhoj, J. T. Engineering Economy, 1? Ediüon,
McMillan Publishing Co., pp. 2-40, pp. 52-60.
Park, C. S. Contemporary Engineering Economis 5tl Ediöon, Pearson Educaüon, Inc.,
pp. 29-42.
White, J. A./ Case, K. E.I Pratt, D. B./ Agee, M. H. Ptindpl$ of Engineering Economic
Analysis, 401 Ediöon, John Wiley & Sons, Inc., pp. 7-29.
http://wm.businessdictionary.com/definidon http://www.investorwords.com
http://wwa.investopedia.com/terms
Problems
1.01 EE Board Exam April 2016
A bike wodh P 10 000.00 is discounted now at 10 percent. Four months later the bike

Solution:

PIO 000 ; = ; d2 = 15%

S = C(l- d2) = PIO 000 S = P7650
1.02 EE Board Exam March 1998
A bookstore purchased a best selling book at P200.OO per copy. At what price
should this book be sold so that by giving a 20% discount, the profit is 30%?

Soluåon:
C = P200/bk; d = ; r = 30%
Profit = rc .... eq. 1 Profit =
Equating 1 and 2

(1+r)C (1+0.3) P200/bk

I-d (1-0.2) s = P325/bk
1.03 ME Board Exam October 2006
Tom earned $200.00 for working 40 hours, if he works overtime, he will be paid 1 h
times his regular income. If Tom received a total of $230.00, what is the total
number of hours he worked?

Soluåon:

Standard Rate = $200 $5/hr 40hr

Overtime Rate = 1.5($5/hr) = $7.5/hr

Hours of Overtime = $(230 - 200) — 4hrs $7.5/hr

Total No. of Hours = (40 + 4) hrs = 44hrs

1.04 ECE Board Exam April 1991

1-13
 The cost of running an electronic shop is made up of the following: office rental
40%, labor = 35%, material = 20% and miscellaneous = 5%. If the office rental is
increased by 24%, labor increased by 15%, cost of materials increased by 20% and
the miscellaneous are unchanged, find the percentage increase in the cost of
running the shop.
Soluton:

New Cost (Original Cost) (l+%increase per item)

Office Rental 0.496

Labor
0.4025
Material
0.24
Miscellaneous 0.05
1.1885
% increase = 1.1885 - 1 = 0.1885
% increase = 18.85%
1.05 ME Board Exam April 1991
A Mechanical Engineer who was awarded a P450 000.00 contract to install the
machineries of an oil mill failed to finish the work on time. As provided for in the
contract, he has to pay a daily penalty equivalent to one-fourth of one per cent per day
for the first 10 days and 0.5% per day for the next 10 days and one per cent per day for
everyday thereafter. If the total penalty was P60 750.00, how many days was the
completion of the contract delayed? Soluåon:

Penalty for the first 10 days = 1/4

= Pil 250
Penalty for the next 10 days = = P22 500
Daily penalty for the succeeding days = (0.01)(P450 000)(x) = (P4500)x
Total Penalty
Pli 250 + P22 500 + (P4500)x = P60 750 x =
6 days

Total number of days = 10 + 10 + 6

= 26 days

1.06 A machine shop has an order for 12 000 pcs of a machine part that requires
anticorrosive properües. Chromium steel alloy that cost P95.OO/kg or Nickel steel

1-14
 alloy that cost P65.OO/kg may be used. The weight per piece, producion rate per
day and tool bit replacement cost for Cr-alloy are; 0.25 kg, 75 pcs and P1600.OO
for every 400 pcs produced. The respective data for Ni-alloy are 0.3 kg, 50 pcs and
P1800.OO for every 300 pcs produced. If the charge for labor and other operating
cost is P450/day, with all other expenses being the same, determine which
material should be used.

Soluöon:
Cost of Chromium Steel Alloy:
= P23.75
Materials = 6.00
Labor = (P450/day)(day/75 pcs) 4.00
Tool Bit = (P1600/400 pcs) P33.75/pc
000 P405 000

Ost of Nickel Steel Alloy:

p19.50
Labor = (P450/day)(day/50 PG) 9.00
Tool Bit (P1800/300 ps) 5.00
P34.50/pc

000 PG) P4i4 000

The use of Gromium Steel Alloy would be more economical

1.07 A stel plpe-cutdng machine that uses a special blade may be operated at eiåer
300 rpm or 400 rpm. At 300 rpm, the output Is 150 pieces and blade resharpening js
done every 8 hours. At 400 rpm values are 180 pieces and 6 hours, respec•åvely. The
machine operator Is pald P50.OO/hr Inclusive of the dme for blade resharpening and
resetting. The depreclatlon charge against the machine Is P80.OO/hr. The blade
P3750.OO and can be resharpened 25 times. If each blade resharpening resetting
requires one hour and cose P120.OO, which operaäng speed would recommend?
Sdudon:

At 300 rpm
Producåon Cost
Labor Cost= p 450
Depreciaåon
Blade Cost =P3750 / 25 150
1-15
 Resharpenjng and Resetting Cost 120
P 1360
in 8 hours = (8 hrs) (150 ps/hr) = 1200 ps Cost
per piece = P1360 /1200 = Pl.10/pc.

At 400 rpm
Cost
Labor Cost

350
Depreciation Cost480
Blade Cost
150
Resharpenlng and Resetting Cost120
P 1100
In 6 hours (6 hrs) (180 ps/hr) 1080
Cost per piece PIIOO /1080 ps = Pl.OO/pce
An operadng speed of 400 rmn is recommended.

1-16