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Engineering Costs
and Cost Estimating
Engineering Costs
Evaluating a set of feasible alternatives
requires that many costs be analyzed.
Examples include costs for: initial
investment, new construction, facility
modification, general labor, parts and
materials, inspection and quality, training,
material handling, fixtures and tooling,
data management, technical support, as
well as general support costs (overhead).
Engineering Costs
Classifications of costs
Fixed - constant, unchanging
Rent is constant (single, married, children)
Typically includes building leases, insurance,
salaries, heating, and lighting costs.
Engineering Costs
For example, in a production environment a
fixed cost, such as costs for factory floorspace
and equipment, remains the same even though
the production quantity, number of employees,
or level of work-in-process are varying.
Labor costs are classified as a variable cost
because they depend on the number of
employees in the factory.
Thus fixed costs are level or constant regardless
of output or activity, and variable costs are
changing and related to the level of output or
activity.
Fixed cost
$ 225.00
$ 225.00
$ 225.00
$ 225.00
$ 225.00
Variable cost
$
$ 100.00
$ 200.00
$ 300.00
$ 400.00
$800.00
Total cost
$ 225.00
$ 325.00
$ 425.00
$ 525.00
$ 625.00
Cost ($)
People
0
5
10
15
20
Total costs
$600.00
Total cost
$400.00
Fixed cost
$200.00
$0
10
Volume
15 20
Breakeven Charts
Example 2
DK developed an overall total cost equation for his
business expenses.
Now DK wants to evaluate the potential to make money
from this chartered bus trip.
Total Cost = Total Fixed Cost + Total Variable Cost
= $225 + ($20)(the number of people on the trip)
Let x = number of people on the trip
Thus,
Total Cost = 225 + 20x
Breakeven Charts
What he lacks is a revenue equation to offset his costs.
DK's total revenue from this trip can be expressed as:
Total Revenue =
= (Charter ticket price)(number of people on the trip)
= (ticket price)(x)
Profit or loss can now be calculated as:
Total Profit =
= [Total Revenue] - [Total Costs]
= [ticket price]x [225 + 20x]
If he charged a charter ticket price of $35, then
= [35x] - [225 + 20x]
= 15x - 225
Breakeven Charts
Example 2
People
0
5
10
15
20
25
30
35
40
Variable Costs
Event Tickets
$
12.50
Refreshments $
7.50
Total VC
$
$
$
$
$
$
$
$
$
Fixed cost
225.00
225.00
225.00
225.00
225.00
225.00
225.00
225.00
225.00
Ticket price
$
35.00
20.00
Variable cost
$
$
100.00
$
200.00
$
300.00
$
400.00
$
500.00
$
600.00
$
700.00
$
800.00
$
$
$
$
$
$
$
$
$
Total cost
225.00
325.00
425.00
525.00
625.00
725.00
825.00
925.00
1,025.00
Revenue
$
$
175.00
$
350.00
$
525.00
$
700.00
$
875.00
$ 1,050.00
$ 1,225.00
$ 1,400.00
Profit
Region
$ (225.00)
Loss
$ (150.00)
Loss
$ (75.00)
Loss
$
Breakeven
$
75.00
Profit
$ 150.00
Profit
$ 225.00
Profit
$ 300.00
Profit
$ 375.00
Profit
Cost ($)
Fixed Costs
Bus Rental
$ 80.00
Gas Expense $ 75.00
Other Fuels
$ 20.00
Bus Driver
$ 50.00
Total FC
$ 225.00
Total cost
$1,000.00
Fixed cost
$500.00
Revenue
$0
5 10 15 20 25 30 35 40
Volume
Expense Types
Recurring costs known, anticipated
and occurs at regular intervals.
Purchasing food, paying rent.
Incremental Costs
An incremental cost is the difference between the
costs of two alternatives.
Example 4
Choose between alternative models A and B. What
incremental costs occur with model B?
Costs
Model
Cost Items
Purchase price
Installation costs
Annual maintenance costs
Annual utility expenses
Disposal costs after useful life
A
$ 10,000.00
$ 3,500.00
$ 2,500.00
$ 1,200.00
$ 700.00
B
$ 17,500.00
$ 5,000.00
$ 750.00
$ 2,000.00
$ 500.00
Incremental
$ 7,500.00
$ 1,500.00
$(1,750.00)
$ 800.00
$ (200.00)
Life-cycle Costs
Life-cycle - all the time from the initial
conception of an idea to the death of a
product (process).
Life-cycle costs - sum total of all the
costs incurred during the life cycle.
Life-cycle costing - designing a
product with an understanding of all the
costs associated with a product during
its life-cycle.
Product Life-cycle
Cost Estimating
Economic analysis is future based.
Costs and benefits in the future require
estimating.
Estimated costs are not known with
certainty.
The more accurate the estimate, the
more reliable the decision.
Estimating is the foundation of
economic analysis.
Types of Estimates
Estimating Models
Model
Explanation
Per Unit
Segmenting
Cost Indexes
Power Sizing
Triangulation
Learning
Curve
Examples
US CPI
Estimating Benefits
So far we have focused on cost terms and cost
estimating.
However, engineering economists must often
also estimate benefits.
Example benefits include sales of products,
revenues from bridge tolls and electric power
sales, cost reductions from reduced material or
labor costs, reduced time spent in traffic jams,
and reduced risk of flooding.
These benefits are the reasons that many
engineering projects are undertaken.
The cost concepts and cost estimating models
can also be applied to economic benefits.
Capital costs
$ (80,000.00)
$ 10,000.00
O&M
Overhaul
$ (12,000.00)
$ (12,000.00)
$ (12,000.00)
$ (12,000.00)
$ (12,000.00)
$ (12,000.00)
Total
$ (80,000.00)
$ (12,000.00)
$ (12,000.00)
$ (25,000.00) $ (37,000.00)
$ (12,000.00)
$ (12,000.00)
$ (2,000.00)
Cash flow
Cash flow
$20,000.00
$$(20,000.00)
$(40,000.00)
$(60,000.00)
$(80,000.00)
$(100,000.00)
Overhaul
O&M
Capital costs
Ye ar
Summary
This chapter introduced the cost concepts: fixed and
variable, marginal and average, sunk, opportunity,
recurring and nonrecurring, incremental, cash and
book, and lifecycle.
Fixed costs are constant and unchanging as
volumes change, while variable costs change as
output changes.
Fixed and variable costs are used to find the
breakeven value between costs and revenues, as
well as the regions of net profit and loss.
A marginal cost is for one more unit, while the
average cost is the total cost divided by the number
of units.