Cost Analysis and Estimating for Engineering and Management
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1 Cost Analysis and Estimating for Engineering and Management Chapter 9 Cost Analysis Ch 9-1
2 Overview Making Decisions (Tradeoffs) Cash Flow Effects Variations on Breakeven Analysis Marginal Costs, Revenues, Profits Life Cycle Costs Ch 9-2
3 Tradeoffs Between/Among Design Alternatives Proceed or Terminate Make or Buy Current or Proposed Product/Method Often Before or During Design Ch 9-3
4 Product Development Ch 9-4
5 Tradeoff Study Search for Alternatives Determine Cost Estimates Use Comparative Economy Consider Constraints Understand Irreducible Factors Make Decisions Ch 9-5
6 Considering Cash Flow Amount and Timing of Cash Coming In, From Sales Going Out, In Expenses Also Depreciation Taxes Inflation/Deflation Ch 9-6
7 Taxation Effects on Cash Flow Property Taxes Fixed, Comparatively Small Sales Taxes Part of Material/Equipment Cost Income Taxes Federal and Sometimes State Ch 9-7
8 Income Taxes Proportion of Gross Income Taxable income = gross income - all expenses (except capital - depreciation deductions expenditures) Net Income: What s Left After Taxes Paid Eq 9.1 Ch 9-8
9 Graduated Tax Schedule If Income is Between and The tax is of the Amount Over $ 0 $50,000 15% 0 50,000 75,000 $ 7, % 50,000 75, ,000 13, % 75, , ,000 22, % 100, ,000 10,000, , % 335,000 10,000,000 15,000,000 3,400, % 10,000,000 15,000,000 18,333,333 5,150, % 15,000,000 18,333,333. 6,416, % 0 Ch 9-9
10 Inflation/Deflation Value of Dollar Changes Purchasing Power Quantized Through Indices For Comparisons Over Long Times D r = D a 1 1+ f n k Eq 9.3 Ch 9-10
11 Calculating Cash Flow Usually for Annual Basis Only for Top/High Level Mathematically: c ( G D C)( t) F = + c 1 Dc Eq 9.4 Ch 9-11
12 Breakeven How Many Must Be Sold to Recover Costs Relationship Cost Price Volume Profit Ch 9-12
13 Linear Cost Case Fixed Cost Is Constant for Period Does Not Change with Quantity Variable Cost Is Linear Constant per Unit Cost No Production, No Variable Cost Ch 9-13
14 Calculations Total Cost C = C + T f nc v Eq 9.6 Cost per Unit Total Revenue C u = C T n Eq 9.7 R = nr T v Eq 9.8 Ch 9-14
15 Breakeven Point For Linear Variable Cost n BE = R v C f C v Eq 9.9 Higher Quantities Reduce Fixed Cost per Unit Ch 9-15
16 Breakeven Chart Ch 9-16
17 Per Unit Chart Ch 9-17
18 Linear Comparisons Breakeven Process Can Be Used to Compare Alternatives Between Two Processes (Isocost Point) Make-or-Buy Reducing Material Costs Tax Effects Ch 9-18
19 Process Comparison Ch 9-19
20 Make or Buy Ch 9-20
21 Material Cost Reduction Ch 9-21
22 Tax Effects Ch 9-22
23 Semi-Fixed Costs Cost Changes In Steps Changes Infrequent During Scope Examples Add Another Shift Add Another Machine/Line Total Cost C = C + C + T f sf nc v Eq 9.10 Ch 9-23
24 Semi-Fixed Cost Chart Ch 9-24
25 Semi-Fixed per Unit Chart Ch 9-25
26 Nonlinear Cost Per Unit Variable Cost Is Not Constant Per Unit Revenue May Also Vary Add Nonlinear Variable and Fixed Costs Divide By Number of Units to Get Average Unit Cost Ch 9-26
27 Cost Schedule Units C f nc v C T C T /n 0 $4,000 $4, ,000 $800 4,800 $4, ,000 1,120 5,120 2, ,000 1,340 5,340 1, ,000 1,600 5,600 1, ,000 1,900 5,900 1, ,000 2,520 6,520 1, ,000 3,520 7,520 1, ,000 4,800 8,800 1,100 Ch 9-27
28 Marginal Cost, Revenue, Profit Associated with an Additional Unit of Production Can Be Nonlinear Marginal Cost = C T / n λ Marginal Revenue = R T / n λ Marginal Profit = R T / n - C T / n Ch 9-28
29 Product Analysis n 0 Marginal Cost Marginal Revenue Marginal Profit 1 $800 $2,000 $1, ,000 1, ,000 1, ,800 1, ,500 1, , ,000 1, ,280 1,100 (180) Ch 9-29
30 Total Revenue and Cost Ch 9-30
31 Marginal Plots Ch 9-31
32 Revised Breakeven Analysis Find Linear Approximation for Revenue Data Regression Analysis Breakeven R = nr + T n BE = v C R f v R f R C f v Eq 9.11 Eq 9.13 Ch 9-32
33 Linear Breakeven Ch 9-33
34 Higher Order Solutions To Fit Some Data Higher Order Polynomial Regression Is Needed Marginal Cost/Revenue Determined Using Derivation of Regressed Models C m = dc dn Eq 9.14 Eq 9.15 T R m = dr T dn Ch 9-34
35 Nonlinear Cost & Revenue Ch 9-35
36 Marginal Plots Ch 9-36
37 Consequences Minimum & Maximum Production Limits Marginal Profit = Zero dz dn = dr T dn dc dn Optimum Sales Revenue, Production Cost, Profit But Not All at the Same Point T = 0 Eq 9.17 Ch 9-37
38 Life Cycle Cost Considers Costs for Entire Life Production / Acquisition Operation Maintenance / Upkeep Salvage Value / Disposal Recycling Sum of All Costs from Concept Forward Ch 9-38
39 LCC Use Used for Comparing Alternatives Initial Cost and Operating /Use Cost For Example High Cost, Reliable Item Low Cost, More Repair / Replacement Pay Now or Pay Later Ch 9-39
40 Estimates Required for LCC Design Capital Investment Operation, Maintenance, Use Replacement Upgrading Salvage Ch 9-40
41 Phases of Project Life Ch 9-41
42 End of Life Worn Out Ceases Function Loss of Profit Costs Too Much to Continue Operation Obsolete Purpose No Longer Exists Superior Replacement Available Ch 9-42
43 Operating & Maintenance Costs Need Operating Profile Maintenance Schedule Repair Data Scheduled Maintenance (Preventative) PM actions = PM SOH cycle time Eq 9.18 Ch 9-43
44 Breakdown Costs Mean Time Between Failure (MTBF) Mean Time to Repair (MTTR) C = cm SOH MTBF ( MTTR) C m Eq 9.19 Ch 9-44
45 LCC Comparison Ch 9-45
46 Long Life Costs Life in Multiple Years Interest Rate Considerations Time Value of Money $1 in 5 Years Is Worth Less Today Impacts LCC Calculations Covered In Chapter 10 Ch 9-46
47 Summary Methods for Making Tradeoff Decisions Considerations Involving Cash Flow More Complicated Breakeven Models Marginal Costs, etc. Limits on Production Costs for Entire Life Cycle Ch 9-47
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