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![Page 1: Ch 9-1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating.](https://reader035.fdocuments.us/reader035/viewer/2022062803/56649f0e5503460f94c22e62/html5/thumbnails/1.jpg)
Ch 9-1© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Cost Analysis and Estimatingfor Engineering and Management
Chapter 9
Cost Analysis
![Page 2: Ch 9-1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating.](https://reader035.fdocuments.us/reader035/viewer/2022062803/56649f0e5503460f94c22e62/html5/thumbnails/2.jpg)
Ch 9-2© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Overview
Making Decisions (Tradeoffs) Cash Flow Effects Variations on Breakeven Analysis Marginal Costs, Revenues, Profits Life Cycle Costs
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Ch 9-3© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Tradeoffs
Between/Among Design Alternatives Proceed or Terminate Make or Buy Current or Proposed Product/Method Often Before or During Design
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Ch 9-4© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Product Development
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Ch 9-5© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Tradeoff Study
Search for Alternatives Determine Cost Estimates Use Comparative Economy Consider Constraints Understand Irreducible Factors Make Decisions
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Ch 9-6© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Considering Cash Flow
Amount and Timing of Cash Coming In, From SalesGoing Out, In Expenses
AlsoDepreciationTaxesInflation/Deflation
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Ch 9-7© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Taxation Effects on Cash Flow
Property TaxesFixed, Comparatively Small
Sales TaxesPart of Material/Equipment Cost
Income TaxesFederal and Sometimes State
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Ch 9-8© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Income Taxes
Proportion of Gross Income
Net Income: What’s Left After Taxes Paid
Eq 9.1
deductionson depreciati -
es)expenditur capital(except expenses all -
income gross =income Taxable
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Ch 9-9© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Graduated Tax ScheduleIf Income is
Between
and
The tax isof 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 10,000,000 113,900 + 34% 335,000
10,000,000 15,000,000 3,400,000 + 35% 10,000,000
15,000,000 18,333,333 5,150,000 + 38% 15,000,000
18,333,333 …. 6,416,667 + 35% 0
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Ch 9-10© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Inflation/Deflation
“Value” of Dollar ChangesPurchasing PowerQuantized Through Indices
For Comparisons Over Long Times
Eq 9.3 1
1kn
arf
DD
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Ch 9-11© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Calculating Cash Flow
Usually for Annual Basis Only for Top/High Level Mathematically:
Eq 9.4 1 ccc DtCDGF
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Ch 9-12© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Breakeven
How Many Must Be Sold to Recover Costs
RelationshipCostPriceVolume Profit
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Ch 9-13© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Linear Cost Case
Fixed Cost Is Constant for PeriodDoes Not Change with Quantity
Variable Cost Is LinearConstant per Unit CostNo Production, No Variable Cost
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Ch 9-14© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Calculations
Total Cost
Cost per Unit
Total Revenue
Eq 9.6
Eq 9.7
Eq 9.8
vfT nCCC
n
CC T
u
vT nRR
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Ch 9-15© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Breakeven Point
For Linear Variable Cost
Higher Quantities Reduce Fixed Cost per Unit
Eq 9.9 vv
fBE
CR
Cn
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Ch 9-16© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Breakeven Chart
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Ch 9-17© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Per Unit Chart
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Ch 9-18© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Linear Comparisons
Breakeven Process Can Be Used to Compare Alternatives
Between Two Processes (Isocost Point)Make-or-BuyReducing Material CostsTax Effects
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Ch 9-19© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Process Comparison
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Ch 9-20© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Make or Buy
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Ch 9-21© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Material Cost Reduction
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Ch 9-22© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Tax Effects
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Ch 9-23© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Semi-Fixed Costs
Cost Changes In Steps Changes Infrequent During Scope Examples
Add Another ShiftAdd Another Machine/Line
Total CostEq 9.10 vsffT nCCCC
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Ch 9-24© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Semi-Fixed Cost Chart
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Ch 9-25© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Semi-Fixed per Unit Chart
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Ch 9-26© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
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
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Ch 9-27© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Cost ScheduleUnits Cf nCv CT CT/n
0 $4,000 $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
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Ch 9-28© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Marginal Cost, Revenue, Profit
Associated with an Additional Unit of Production
Can Be Nonlinear Marginal Cost = CT / n
Marginal Revenue = RT / n
Marginal Profit = RT / n - CT / n
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Ch 9-29© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
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 1,100 100
8 1,280 1,100 (180)
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Ch 9-30© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Total Revenue and Cost
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Ch 9-31© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Marginal Plots
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Ch 9-32© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Revised Breakeven Analysis
Find Linear Approximation for Revenue Data
Regression Analysis
BreakevenEq 9.11
Eq 9.13
fvT RnRR
vv
ffBE
CR
RCn
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Ch 9-33© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Linear Breakeven
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Ch 9-34© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Higher Order Solutions
To Fit Some Data Higher Order Polynomial Regression Is Needed
Marginal Cost/Revenue Determined Using Derivation of Regressed Models
Eq 9.14 Eq 9.15
dn
dCC T
m dn
dRR T
m
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Ch 9-35© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Nonlinear Cost & Revenue
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Ch 9-36© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Marginal Plots
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Ch 9-37© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Consequences Minimum & Maximum Production Limits
Marginal Profit = Zero
Optimum Sales Revenue, Production Cost, ProfitBut Not All at the Same Point
Eq 9.17 0dn
dC
dn
dR
dn
dZ TT
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Ch 9-38© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Life Cycle Cost
Considers Costs for Entire LifeProduction / AcquisitionOperationMaintenance / UpkeepSalvage Value / DisposalRecycling
Sum of All Costs from Concept Forward
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Ch 9-39© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
LCC Use
Used for Comparing Alternatives Initial Cost and Operating /Use Cost For Example
High Cost, Reliable ItemLow Cost, More Repair / ReplacementPay Now or Pay Later
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Ch 9-40© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Estimates Required for LCC
Design Capital Investment Operation, Maintenance, Use Replacement Upgrading Salvage
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Ch 9-41© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Phases of Project Life
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Ch 9-42© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
End of Life
Worn Out Ceases Function
Loss of ProfitCosts Too Much to Continue Operation
ObsoletePurpose No Longer ExistsSuperior Replacement Available
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Ch 9-43© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Operating & Maintenance Costs
NeedOperating ProfileMaintenance ScheduleRepair Data
Scheduled Maintenance (Preventative)
Eq 9.18 timecycle
=actions PM
SOHPM
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Ch 9-44© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Breakdown Costs
Mean Time Between Failure (MTBF) Mean Time to Repair (MTTR)
Eq 9.19 mcm CMTTRMTBF
SOHC
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Ch 9-45© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
LCC Comparison
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Ch 9-46© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
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
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Ch 9-47© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
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