Engineering Economics
(HM421)
Engineering Costs and Cost
estimating
Chapter 2
Engineering Costs
- Classification of Costs
Fixed - constant, unchanging
Rent is constant, Equipment cost
Variable - depend on activity level
Labor cost depend upon number of employees in factory
Marginal - variable cost for the next unit
Cost of producing one more unit of Fan
Average - Average cost per unit
total cost/number of units
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Engineering Costs
- Example 2-1
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Engineering Costs
- Example 2-1
Fixed Costs Variable Costs
Bus Rental $ 80.00 Event Tickets $ 12.50
Gas Expense $ 75.00 Refreshments $ 7.50
Other Fuels $ 20.00 Total costs
Bus Driver $ 50.00
Total FC $ 225.00 Total VC $ 20.00 $700.00
$600.00
$500.00
Cost ($)
$400.00 Total cost
$300.00 Fixed cost
People Fixed cost Variable cost Total cost $200.00
0 $ 225.00 $ - $ 225.00 $100.00
$-
5 $ 225.00 $ 100.00 $ 325.00 0 5 10 15 20
10 $ 225.00 $ 200.00 $ 425.00
15 $ 225.00 $ 300.00 $ 525.00 Volume
20 $ 225.00 $ 400.00 $ 625.00
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Engineering Costs
- Example 2-2
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Engineering Costs
- Example 2-2
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Engineering Costs
- Profit and Loss
Breakeven: total revenue = total costs
Just getting own money back
Profit region: total revenue > total costs
Putting money in the bank
Loss region: total revenue < total costs
Going into debt
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Engineering Costs
- Profit and Loss
Profit-loss breakeven chart for Example 2-1 and 2-2
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Engineering Costs
- Sunk Costs and Opportunity Costs
Sunk cost: money spent due to a past decision. We
cannot do anything about these costs.
Purchase price paid for a car two years ago
Opportunity cost: a benefit that is foregone by
engaging a resource in a chosen activity instead of
engaging that same resource in some foregone activity.
We make a choice or decision.
Buying lunch instead of gas
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Engineering Costs
- Recurring and Non-Recurring Costs
Recurring Costs: anticipated and occur at regular
intervals.
Purchasing food, paying rent
Non-Recurring Costs: one-of-a-kind event that occurs
at an irregular interval.
Illness, accident, death
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Engineering Costs
- Recurring and Non-Recurring Costs
Recurring Costs: anticipated and occur at regular
intervals.
Purchasing food, paying rent
Non-Recurring Costs: one-of-a-kind event that occurs
at an irregular interval.
Illness, accident, death
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Engineering Costs
- Incremental Costs
An incremental cost is the difference between the costs
of two alternatives.
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Engineering Costs
- Example 2-4
Philipis choosing between model A (a budget model)and
model B (with more features and a higher purchase
price). What incremental costs would Philip incur if he
chose model B instead of the less expensive model A?
Costs
Model
Incremental
Cost Items A B
Purchase price $ 10,000.00 $ 17,500.00 $ 7,500.00
Installation costs $ 3,500.00 $ 5,000.00 $ 1,500.00
Annual maintenance costs $ 2,500.00 $ 750.00 $(1,750.00)
Annual utility expenses $ 1,200.00 $ 2,000.00 $ 800.00
Disposal costs after useful life $ 700.00 $ 500.00 $ (200.00)
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Engineering Costs
- Cash and Book Costs
Cash costs: movement of money from one owner to
another - also known as a cash flow.
Payment this month on an auto loan
Book cost: cost of a past transaction that is recorded in a
book.
Down payment recorded in your checkbook from last year’s
automobile purchase
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Engineering Costs
- Life Cycle Costs
Life Cycle: all the time from conception to death of a
product (process).
Life Cycle Costs: Total of all the costs incurred during
the life cycle.
Life Cycle Costing: designing with an understanding of
all the costs associated with a product during its life-
cycle.
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Engineering Costs
- Typical Life Cycle
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Engineering Costs
- Life Cycle Costs
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Engineering Costs
- Life Cycle Costs
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Engineering Costs and Cost Estimating
- Summary
Donald G. Newnan, et al., “Engineering Economic
Analysis,” 9th Edition, Oxford University Press (Read
Chapter No 2)
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