Cost Analysis and Estimating for Engineering and Management Chapter 11 The Enterprise Entrepreneurship And Imaginamachina

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1 Cost Analysis and Estimating for Engineering and Management Chapter 11 The Enterprise Entrepreneurship And Imaginamachina Ch 11-1

2 Overview The Business of New Ideas Entrepreneurship Designing for Profit Top Down Cost Targets Designing for Manufacture Financing the Enterprise Legal and Ethical Issues Ch 11-2

3 Changes Starting a New Business Big Changes to Existing Business Less Than 1% of New Products Succeed Only 2% of Patented Ideas Develop Competition is Intense Need Good Business Planning and Funding, Along with a Good Idea Ch 11-3

4 The Enterprise Ch 11-4

5 Free Enterprise Producers Make What They Want (Or Not) Charge What They Want Compete How They Want Customers Buy What They Want (Or Not) Buy From Whom They Want Ch 11-5

6 Business Motivated By Profit Players Include Owners Employees Customers Cannot Succeed By Maintaining the Status Quo Ch 11-6

7 Launching a Product Ch 11-7

8 Marketing Identifies a Demand for a Product Creates a Demand for a New Product New Technologies Emerge and Grow Innovation Growth Standardization Maturity Need Differing Marketing Approaches Ch 11-8

9 Entrepreneurship Entrepreneurs Supply the Ideas Have a Long Term Vision Are Flexible and Adaptable Successful Companies Must Continually Add New Products Connect Entrepreneurs with Funding Ch 11-9

10 Design for Profit Top Down Estimate Starts with a Market Price Ends with Target Costs Ensures: Product Meets Market Price Production Can Meet Cost Targets Profit Determines Feasibility (Proceed or Kill) Ch 11-10

11 Example Ch 11-11

12 Design for Manufacture Smart Designs Reduce Cost Large Topic Area Lots of Guidelines, Checklists, etc. Too Big for This Discussion Develop and Compare Design Alternatives Satisfies Design and Cost Requirements Ch 11-12

13 Alternative Design Comparison Die casting aluminum Investment casting of alloy and machining titanium alloy Finish µ in µ in Tolerance ± in. ± in. Limitations Difficult to fixture, little cost saving with lot sizes Expensive pattern tooling Advantages Good for small lot sizes Good accuracy, big cost decrease for lot size, less machining Reliability 1,500,000 cycles 3,250,000 cycles Hardness Soft Harder in impact Ch 11-13

14 Example of Alternative Costs Lot qty Machining parts from aluminum Die casting aluminum parts Die casting single aluminum part Single part titanium casting, bigger tolerances, no machining 10 $ $ $57.21 $ Ch 11-14

15 Make-or-Buy Find Least Cost Source Suppliers May Have Lower Cost Better Technology More Experience Better Fit for the Job Compare on Same Basis Lowest Price Is Not Always Lowest Cost Ch 11-15

16 Cost to Buy In Addition to Quoted Price Transportation Costs Purchasing and Order Management Cost Receiving Costs Incoming Inspection Cost Ch 11-16

17 Intangibles with Buying Schedule Control Quality Visibility into Status Ch 11-17

18 Considerations for Make Capability Does the Company Have: The Technology The Skills The Capacity Capacity Shop Load (Plant Utilization) Affects Cost Determination Ch 11-18

19 Costs Based on Utilization Cost items Less than 100% Plant Utilization Direct labor Include Include Direct material Include Include Variable overhead Include Include Fixed overhead Omit Include Marginal cost Include Include Sunk cost Omit Omit Greater than 100% Profit Omit Management choice Ch 11-19

20 Enterprise Plan Executive Summary Objectives and Potential Product and Processes Descriptions Keys to Success Market Analysis Income and Cost Analysis Assessment Ch 11-20

21 Example Cost Chart Ch 11-21

22 Example Financial Chart Ch 11-22

23 Assessment Economic Evaluation Criteria for Enterprise Plans Affordability and total cost Percent profit on investment Percent profit on sales Annual cost of production of the product Unit cost to produce and sell Unit cost to produce and sell, including profit and taxes Payout period and return on investment Amount and time strategy for liquidation Other yield calculations on investment Ch 11-23

24 Entrepreneur s Challenge Must Understand the Project and Plan Completely Consider and Address Potential Questions Thoroughly Review the Plan Be Able to Answer Any and All Questions Ch 11-24

25 Funding the Enterprise Personal Resources Existing Company Resources Private Investors Public Funding Stocks Bonds Debt (Loans) Alliances Ch 11-25

26 Stocks Small Units of Ownership Stock Price Appreciation (Share of Growth) Dividends (Share of Profits) No Guarantees May Loose Investment Ch 11-26

27 Stock Terms Market Capitalization Share Price x Number of Shares Price Earnings Ratio Stock Price per Share Earnings Preferred Stock Specified Dividend Rate Preference Over Common Stock Ch 11-27

28 Debt (Loans) Specified Repayment Amounts and Times Requires Interest Payments Credit Rating Affects Interest Rate Interest Is Tax Deductible Expense Ch 11-28

29 Bonds Stock Is Expensive and Continues Indefinitely Bonds Are Limited Life Borrowing from Investors Fixed Income Stream (Interest) Principal Repaid at End of Term Ch 11-29

30 Bond Interest Called Coupon Rate Based on U.S Treasury 30-Year Bonds Credit Rating Determines Margin Margin Rate Above Treasury Rate High Interest Rates Makes Capital Expensive Ch 11-30

31 Bond Terms Face Value (Par) Amount to Be Paid at Maturity Coupon Rate Yield Sets Magnitude of Interest Payments Coupon Rate Price Ch 11-31

32 Bond Values Sale Price Is Approximately the Par Value Present Value Sum of Remaining Interest Payments Plus the Amount Paid at Maturity All Discounted at a Required Interest Rate P0 = I( P / A, ib, n) + M ( P / F, ib, n) Eq 11.1 Ch 11-32

33 Bond Trading Bonds Can Be Traded on the Market Sales Price Depends on Current Interest Rates Original Purchase Price Means Nothing Higher Current Interest Rates Lower the Bond Price Ch 11-33

34 Alliances Joining with Another Company or Individual Limited Partnership Joint Venture Venture Capital Ch 11-34

35 Seeking Alliances Offering Develop an Enterprise Plan Present to Interested Parties Assessment and Due Diligence Negotiation and Closing Ch 11-35

36 Types of Enterprise Sole Proprietorship Partnership Any Partner Can Make Commitments for the Business Corporation Legal Entity Limits Liability to Investment Only Ch 11-36

37 Ethics and Engineering Expectation of Highest Standards of Honesty and Integrity Dedication to Protecting the Public Maintain Objectivity in Fact Finding and Cost Analysis Maintain Trust and Fairness Ch 11-37

38 Summary Entrepreneurship and the Enterprise How to Design for Cost and Profit How to Fund the Enterprise Legal Structure of the Enterprise Importance of Ethics Ch 11-38

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