Cost Analysis and Estimating for Engineering and Management

Cost Analysis and Estimating for Engineering and Management Chapter 9 Cost Analysis © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -1

Overview l Making Decisions (Tradeoffs) l Cash Flow Effects l Variations on Breakeven Analysis l Marginal Costs, Revenues, Profits l Life Cycle Costs © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -2

Tradeoffs l Between/Among Design Alternatives l Proceed or Terminate l Make or Buy l Current or Proposed Product/Method l Often Before or During Design © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -3

Product Development © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -4

Tradeoff Study l Search for Alternatives l Determine Cost Estimates l Use Comparative Economy l Consider Constraints l Understand Irreducible Factors l Make Decisions © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -5

Considering Cash Flow l Amount and Timing of Cash -Coming In, From Sales -Going Out, In Expenses l Also -Depreciation -Taxes -Inflation/Deflation © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -6

Taxation Effects on Cash Flow l Property Taxes -Fixed, Comparatively Small l Sales Taxes -Part of Material/Equipment Cost l Income Taxes -Federal and Sometimes State © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -7

Income Taxes l Proportion of Gross Income l Net Income: Eq 9. 1 - What’s Left After Taxes Paid © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -8

Graduated Tax Schedule If Income is Between The tax is and of the Amount Over $ 0 $50, 000 15% 0 50, 000 75, 000 $ 7, 500 + 25% 50, 000 75, 000 100, 000 13, 750 + 34% 75, 000 100, 000 335, 000 22, 500 + 39% 100, 000 335, 000 10, 000 113, 900 + 34% 335, 000 10, 000 15, 000 3, 400, 000 + 35% 10, 000 15, 000 18, 333 5, 150, 000 + 38% 15, 000 6, 416, 667 + 35% 0 18, 333 …. © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -9

Inflation/Deflation l “Value” of Dollar Changes -Purchasing Power -Quantized Through Indices l For Comparisons Over Long Times Eq 9. 3 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -10

Calculating Cash Flow l Usually for Annual Basis l Only for Top/High Level l Mathematically: Eq 9. 4 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -11

Breakeven l How Many Must Be Sold to Recover Costs l Relationship -Cost -Price -Volume -Profit © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -12

Linear Cost Case l Fixed Cost Is Constant for Period -Does Not Change with Quantity l Variable Cost Is Linear -Constant per Unit Cost -No Production, No Variable Cost © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -13

Calculations l Total Cost Eq 9. 6 l Cost per Unit Eq 9. 7 l Total Revenue Eq 9. 8 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -14

Breakeven Point l For Linear Variable Cost Eq 9. 9 l Higher Quantities Reduce Fixed Cost per Unit © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -15

Breakeven Chart © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -16

Per Unit Chart © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -17

Linear Comparisons l Breakeven Process Can Be Used to Compare Alternatives -Between Two Processes (Isocost Point) -Make-or-Buy -Reducing Material Costs -Tax Effects © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -18

Process Comparison © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -19

Make or Buy © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -20

Material Cost Reduction © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -21

Tax Effects © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -22

Semi-Fixed Costs l Cost Changes In Steps l Changes Infrequent During Scope l Examples -Add Another Shift -Add Another Machine/Line l Total Cost Eq 9. 10 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -23

Semi-Fixed Cost Chart © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -24

Semi-Fixed per Unit Chart © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -25

Nonlinear Cost l Per Unit Variable Cost Is Not Constant l Per Unit Revenue May Also Vary l Add Nonlinear Variable and Fixed Costs l Divide By Number of Units to Get Average Unit Cost © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -26

Cost Schedule Units Cf n. Cv CT CT/n 0 $4, 000 1 4, 000 $800 4, 800 $4, 800 2 4, 000 1, 120 5, 120 2, 560 3 4, 000 1, 340 5, 340 1, 780 4 4, 000 1, 600 5, 600 1, 400 5 4, 000 1, 900 5, 900 1, 180 6 4, 000 2, 520 6, 520 1, 087 7 4, 000 3, 520 7, 520 1, 074 8 4, 000 4, 800 8, 800 1, 100 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -27

Marginal Cost, Revenue, Profit l Associated with an Additional Unit of Production l Can Be Nonlinear l Marginal Cost = CT / n l Marginal Revenue = RT / n l Marginal Profit = RT / n - CT / n © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -28

Product Analysis n Marginal Cost Marginal Revenue Marginal Profit 0 1 $800 $2, 000 $1, 200 2 320 2, 000 1, 680 3 220 2, 000 1, 780 4 260 1, 800 1, 540 5 300 1, 500 1, 200 6 620 1, 200 580 7 1, 000 1, 100 8 1, 280 1, 100 (180) © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -29

Total Revenue and Cost © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -30

Marginal Plots © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -31

Revised Breakeven Analysis l Find Linear Approximation for Revenue Data -Regression Analysis Eq 9. 11 l Breakeven Eq 9. 13 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -32

Linear Breakeven © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -33

Higher Order Solutions l To Fit Some Data Higher Order Polynomial Regression Is Needed l Marginal Cost/Revenue Determined Using Derivation of Regressed Models Eq 9. 14 Eq 9. 15 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -34

Nonlinear Cost & Revenue © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -35

Marginal Plots © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -36

Consequences l Minimum & Maximum Production Limits -Marginal Profit = Zero Eq 9. 17 l Optimum -Sales Revenue, Production Cost, Profit -But Not All at the Same Point © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -37

Life Cycle Cost l Considers Costs for Entire Life -Production / Acquisition -Operation -Maintenance / Upkeep -Salvage Value / Disposal -Recycling l Sum of All Costs from Concept Forward © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -38

LCC Use l Used for Comparing Alternatives l Initial Cost and Operating /Use Cost l For Example -High Cost, Reliable Item -Low Cost, More Repair / Replacement -Pay Now or Pay Later © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -39

Estimates Required for LCC l Design l Capital Investment l Operation, Maintenance, Use l Replacement l Upgrading l Salvage © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -40

Phases of Project Life © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -41

End of Life l Worn Out -Ceases Function l Loss of Profit -Costs Too Much to Continue Operation l Obsolete -Purpose No Longer Exists -Superior Replacement Available © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -42

Operating & Maintenance Costs l Need -Operating Profile -Maintenance Schedule -Repair Data l Scheduled Maintenance (Preventative) Eq 9. 18 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -43

Breakdown Costs l Mean Time Between Failure (MTBF) l Mean Time to Repair (MTTR) Eq 9. 19 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -44

LCC Comparison © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -45

Long Life Costs l Life in Multiple Years l Interest Rate Considerations -Time Value of Money -$1 in 5 Years Is Worth Less Today l Impacts LCC Calculations l Covered In Chapter 10 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -46

Summary l Methods for Making Tradeoff Decisions l Considerations Involving Cash Flow l More Complicated Breakeven Models l Marginal Costs, etc. l Limits on Production l Costs for Entire Life Cycle © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and Mc. Laren / Cost Analysis and Estimating for Engineering and Management Ch 9 -47