EGR 386W Spring 2014

Transcription

1 EGR 386W Spring 2014

2 Engineering Economics Budget line item table of all project costs Cost Analysis understanding how all lifecycle costs are derived Time Value of Money $1 today has a different value tomorrow Present Values, Future Values, Regular Payments and Receipts Economic Alternatives Payback Periods Return on Investments, etc. Depreciation Not planning to cover, but can be convinced otherwise on the FE exam!

3 Engineering Economy: Basics Why do you need this information? In design process: costs are usually one of the criteria in the decision matrix In proposal/bidding process: need a $ number for how much it will cost the client for you to do the design work To do this, we need: Ways to estimate costs (equipment, personnel) Ways to compare different designs that may involve differing time periods and costs

4 Budget List of all items that will incur an economic cost Costs organized into logical categories Salaries / Labor Travel Equipment (Capital Investments) Materials Assembly Operations / Maintenance Loan Payments, etc. Budget for Design vs. Budget for Product

5 Budget for Design Costs to conceive and evaluate design options Labor Costs (experience + time) Overhead (costs to run your office) Analyses / Prototype Testing / Pilot Plants

6 Budget for Product Cost to build or produce the product Cost of Materials Cost of Equipment Cost of Labor Cost of Overhead Marketing and sales Factory Management

7 Budget Budgets are presented in a tabular format In a report, a budget justification is required Text to explain the budget requirements Sometimes called: Budget Narrative; Budget Requirements, etc.

8 Design of a Water Treatment System for Biodiesel Production Task Senior Engineer Staff Engineer Lab work (Consultant) Research: Biofuel 5 4 Intern Admin. Assistant Research: WW Tech 10 8 Lab Analysis Alt & Select Final Design Document TOTAL DAYS

9 Cost of the Personel The only numbers the client sees. Person Base Pay Rate, $/hr Benefits, % of base pay Actual Pay Rate, $/hr Company Overhead, % of pay Senior ENG Staff ENG Lab Consult Intern Admin Billable Rate, $/hr What the customer is charged.

10 Overhead: How much does it cost to run the firm? Rent (office) = $3000/mo Utilities (elec, gas, water, sewer, phone, internet) = $1000/mo Supplies (office matls, computers, software, expense account, travel) = $2000/mo Vehicle (lease, insurance, maintenance) = $2000/mo Admin (property insurance, taxes, donations) = $2000/mo TOTAL: $10,000/mo; TOTAL w/50% profit: $15,000/mo Overhead daily cost = $15,000/mo / 21.7d/mo = $691/d Project Duration = 90 days; Overhead = 90 * 691 = $62k Collected as a % of the Direct Costs in the Budget.

11 Budget Estimate Labor Costs 1.0 Personnel Person Hours Rate, $/hr Cost, $ SENG 45*8= ,000 ENG 87*8= ,200 LAB 18*8= ,640 INT 87*8= ,880 AA 21*8= ,904 Total personnel 144, Travel Local meetings 6 mtgs*50mi/mtg $0.56/mi Consultants Analytical 15, Overhead X 60%? 5.0 TOTAL?

12 Budget Estimate Labor Costs You do not need to discuss how you compute your overhead costs, nor should you state your profit margin. Exceptions if working for a non-profit (i.e. NAU) - no profit, only overhead, and the overhead rates are determined by a board and public information Competitive pricing will set industry salaries

13 Engineering Economics Cost Analysis Operate in a competitive and global free market Competition is strong lowering cost and increasing profitability is vital to company sustainability But only to a point can compromise on quality, safety or life cycle impacts (Ethical Considerations!)

14 Why are Design Costs so Important? Some of the costs are NOT recoverable! Costs of background research, preliminary designs Costs of time to write proposal or bid Personnel Running the office Some of these costs can be added as overhead THESE COSTS COME OUT OF YOUR PROFITS!

15 Efficiency Physical efficiency = output / input Always < 100%! Economic efficiency = worth / cost Want it > 100%! Example: For every 100 BTU input (in coal), a power plant obtains 32 BTU output (of electricity) the rest is lost to waste heat and powering the operation. Coal is worth $1.34/10 6 BTU; electricity is worth $6.80/10 6 BTU. Physical efficiency? Economic efficiency?

16 Physical efficiency = 32 BTU / 100 BTU * 100 = 32% Economic efficiency = Total value of electricity / Total cost of coal = (32 BTU * $6.80) / (100 BTU * $1.34) * 100 = 162%

17 WARNING: What has time taught us? Economics MUST consider ALL aspects of a product!! Life-cycle analysis : Cost of resource depletion (NOT just extraction) Cost of environmental degradation (NOT just pollution control) Cost of recycle/disposal when product no longer needed Ex: cost of organic apple vs non-organic apple Most economies based on ignoring life-cycle costs. This model no longer is valid. Difficult to put a $ value on elements that MUST be considered!! Externalities Do we try to associate costs with intangibles? Or do we put these factors somewhere else in the decision making process? Let regulation control these costs? Ex: the tobacco industry

18 Economy in Design: a Great Design may NOT be Economically Feasible Design for economy of: Flexibility in raw materials* Production Maintenance Shipping Interchangeability Pollution produced, regulatory costs* Recovery after use* PLUS: Ease of use by customer Safety Long useful life

19 Cost Analysis Decisions made in the design process commit 70-80% of the product cost. Ways that cost estimates can be used Establish the selling price for a product or quotation for a service Determine the most economical method, process or material for manufacturing Sets a benchmark for cost-reduction or cost control Provides information to assess the profitability of a new product

20 Cost Analysis Elements of Cost First Costs costs of getting an activity started Capital equipment Set-up costs (one-time construction) Land, building purchases Variable Costs costs that vary with each unit that is made, sold or purchased Fixed Costs costs that occur regardless of the number of units being made, sold or purchased

21 Variable Costs Examples : Materials Direct Labor and Supervision involved with making / assembling the parts Maintenance costs Packaging and Storage costs Scrap loss or spoilage costs Intellectual Property Licenses (?)

22 Fixed Costs Investment Costs Depreciation on equipment (capital investments) Assembly lines, tooling, buildings, vehicles, furnace, etc. Equipment suffers a loss in value over time Wear, deterioration or obsolescence (new technologies more effective) Interest payments on investment and inventory debts Property Tax Insurance

23 Fixed Costs Overhead Corporate Employees (managers, supervisors, legal, marketing, human resources, etc.) Utilities and telecommunications General supplies and equipment rentals Sales and Technical Service Research and Development (heart of future technology)

24 Cost Elements G.E. Dieter and L.C. Smith, Cost Evaluation in Engineering Design, 5 th Ed. McGraw Hill, 2013, ch. 17, pp

25 Break Even Point X = # of units sold S p = Sales Price, $ / unit C v = variable costs C f = fixed costs Profit = S p X C v X + C f Profit = 0 = BEP How many units sold does it take to reach a break-even point? C f X BEP = S p C v G.E. Dieter and L.C. Smith, Cost Evaluation in Engineering Design, 5 th Ed. McGraw Hill, 2013, ch. 17, pp

26 Break Even Point G.E. Dieter and L.C. Smith, Cost Evaluation in Engineering Design, 5 th Ed. McGraw Hill, 2013, ch. 17, pp

27 Sales Price, S P S p = X C M + C Labor + C Assemble + C Equip + C Waste Variable Costs +C D + C Q + OH factory + OH corporate + Profit X = # of units sold S p = Sales Price, $ / unit C M = material costs C D = design and development costs C Q = quality control costs OH factory = factory overhead OH corporate = corporate overhead Fixed Costs

28 Material Cost, C M Custom Parts design from semi-finished materials Design flexibility Control over quality Requires manufacturing know-how Standard Parts Do not need the in-house skill for fabrication Save on time and labor Lose control of design flexibility Run into supply issues All elements (custom or standard) must be summed in a bill of material for a thorough cost evaluation

29 Labor Cost, C Labor Billable rate to assemble, quality test, logistics, etc. Cost is variable if linked to the volume of parts manufactured Will not include R&D manhours, management or sales

30 Overhead, OH All cost elements not directly associated with production of an identifiable good. Pre-proposal preparation Maintaining an office Etc. Assume a 50% total overhead rate for your design cost analysis. Overhead Charges Direct Charges = 0.5

31 Profit How can Profit be maximized? S p = X C mtrl + C DLabor + C Assemble + C Equip + C Waste +C D + C Q + OH factory + OH corporate + Profit

32 Cost of Ownership, C Sys C Sys = X S p + C Tax + C Oper + C Maintain t + C sp + C Train Variable Costs Fixed Costs X = # of units purchased t = time, (years or months) S p = Sales Price, $ / unit C Oper = operating costs, $/yr C Maintenance = manhr/yr * $/manhr C SP = spare parts C Train = manhr * $ /manhr

33 Techniques to Estimate Cost Analogy Cost estimates based on prior products or projects Requires past experience or published cost data Use historical data correct prices for inflation Use historical data correct prices for differences in size

34 Estimating Historical Costs Correct prices for inflation Inflation = general increase in prices over time Inflation = a given amount of currency will buy less as time goes by Use a cost index to bring historical prices into a present price C 1 = C 0 Index at time 1 Index at time 2 where t = 1 is the present, t = 0 is the past

35 Estimating Historical Costs Correct prices for inflation C 1 = C 0 Index at time 1 Index at time 0 where t = 1 is the present, t = 0 is the past Consumer Price Index to get price of consumable goods Producer Price Index durable + consumable goods

36 Estimating Historical Costs Correct prices for inflation C 1 = C 0 Index at time 1 Index at time 0 where t = 1 is the present, t = 0 is the past Marshall and Swift Index index for industrial equipment costs Published in Chemical Engineering NAU has a subscription SORT&inPS=true&prodId=AONE&userGroupName=nauniv&tabID=T002&searchId=R1&resultListType= RESULT_LIST&contentSegment=&searchType=AdvancedSearchForm&currentPosition=4&contentSet= GALE%7CA &&docId=GALE A &docType=GALE&role=

37 Economy of Scale: Cost - Size Cost of equipment is not always directly proportional to the capacity (size) of the equipment C 1 = C 0 L 1 L 0 X ; where x varies from Note: Cost and Size indexes can be combined

38 Economy of Scale: Cost - Size Cost of equipment is not always directly proportional to the capacity (size) of the equipment C 1 = C 0 L 1 L 0 X ; where x varies from

39 Learning Curve Time to produce a unit will decrease as more of those units are made.

40 Learning Curve Cost to produce a unit will decrease as more of those units are made. y = kx n n = slope of the loglog learning curve

41 Economics Homework Part I: Cost Analysis (20 pts) 1a) Budget the imaginary expenses incurred from the design process 1b) Line item costs for your team design All fixed and variable costs 1c) Determine the cost to manufacture 1, 10 and 100 units (if applicable) 1d) Set a price for your design, assuming you sell 10 units (if applicable) and gain 10% profit Remember profit overhead 1e) Using the above price, determine the costs incurred by the owner (note, you need to assume a design lifetime)