EGG 307 Costs & Cash Flows 5-2016.ppt

7/25/2019 EGG 307 Costs & Cash Flows 5-2016.ppt

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May 2016

Costs and Cash Flows

EGG 307

Summer Session I


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Engineering Economic

Analysis - Seven Steps1. ecogni!e and "orm#late the pro$lem.

2. %evelop "easi$le alternatives.

&. %evelop cash 'ows "or each alternative.

(. Select a criterion )or criteria* "ordetermining the pre"erred alternative.

+. Analy!e and compare alternatives.6. Select the pre"erred alternative.

,. er"orm monitoring and post-eval#ation.


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Cash Flows A cash fowis a receipt or

payment o" an amo#nt o"money dened $y 1* its

dollar val#e and 2* thetime o" its occ#rrence

Cash fow diagramsrepresent costs andreven#es over time.

Cost and Revenue estimationfor the future always involve

uncertainty.

time

/ val#e

0

1 2 & (0


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(

op-%own Estimate he rst step in the determination o" the

cash 'ows is the estimation o" costs andreven#es.

he top-down approach taes data "romsimilar proects and modies them tore'ect the c#rrent proect. Estimate yo#r cost o" a college degree3 #se the

cost o" yo#r $rother4s degree three years agoand ad#st it "or in'ation. Add /+000 "or thecost o" yo#r participation in e5tra c#rric#laractivities )yo#r $rother was a $ooworm*


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+

ottom-7p Estimateshe $ottom-#p approach is more

detailed8 $reaing down the proect

in small managea$le #nits andestimating the cost o" the parts rst. ottom-7p3 rea down anticipated

e5penses in categories3 t#ition and

"ees8 $oos and s#pplies8 livinge5penses8 transportation and estimateeach as acc#rately as possi$le.


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Cost erminology

Cost

rod#ction

9evel )x*0

Fi5edCost

:aria$le Cost ;vx

otal Cost ; Fi5ed


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,

Cost erminology )cont4d* ec#rring>?onrec#rring Costs3 @" costs occ#r every time

the organi!ation prod#ces goods or services8 they arecalled recurring.:aria$le costs are rec#rring.

%irect>@ndirect Costs3 @" costs can $e reasona$lymeas#red and allocated to specic o#tp#t8 they arecalled direct.

verhead Costs3 all costs o" providing goods andservices other than direct la$or and direct material.

Cash>oo Cost3 Cost that involves a payment o" cash iscalled a cash cost. Costs re'ected in the acco#ntingsystem only are called book costs.


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B

pport#nity Costs pport#nity Cost3 Cost o" "orgoing

the chance to earn interest )or

prot* on investment "#nds. E5ample3

o#r grandmother owns her home8

$#t lives with yo#r parents. She rentsher /1B+8000-ho#se "or /(00>month.Dood idea or lost opport#nity


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S#n Costs S#n Costs3 ast costs that are

#nrecovera$le are not relevant "or

decision-maing p#rposes. E5ample3

o# are shopping "or a new car8 and8 thata"ternoon8 nd one yo# really lie "or /1000.

o# leave a /100 deposit and plan to ret#rnthe ne5t day. hat evening8 yo#r "riend oGersto sell yo# her car "or /B+0. Hhat to dothin


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10

00

25

50

75

100

Percent

Time

Life Cycle Cost

Potential for LCC

Savings

Cumulative

Committed LCC

Cumulative LCC

Definition ofRequirements

Conceptualdesign

DetaileddesignProductionPlanning

Facility Aquisition

Aquisition Phase

Production orconstruction

Operation orcustomer use,maintenancesupport

Retirement anddisposal

Operation Phase

9i"e Cycle Costs


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resent Economy St#dies Hhen the in'#ence o" time on money is

not a signicant consideration8 analyses

are re"erred to as present economyst#dies ime hori!on is one year or less

?o opport#nity "or earning interest or prot

he criterion "or selection is #s#ally Select the alternative that ma5imi!es prot

Select the alternative that minimi!es cost


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1+

Material Selection

E5ample A"ter machining8 the nished vol#me o" a certain metal

part is 0.1, inch&

Hhich raw material to choose

Brass Aluminum

Machining time/piece (min) 0.64 0.42

Cost of material ($/lb) 0.6 0.!2

"crap #alue ($/lb)0.24 none

Cost of operator ($/hr) 2.00 2.00

%ensit& of material (lb/in') 0.' 0.

olume of ra material (in') 0.' 0.4!


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9a$or and Material Costs 9a$or cost per piece ; )time per piece*)la$or cost per

time*

rass3 )0.6( min>piece*)/12>hr*)1hr>60 min* ;

/0.12B>pc Al#min#m3 )0.(2 min>piece*)/12>hr*)1hr>60 min*

; /0.0B(>pc

Material cost per piece ;)vol#me o" raw*)l$ per vol#me*)cost per l$*-

)le"tover vol. o" raw*)l$ per vol.*)scrap val#e per l$* rass3 )0.& in&*)0.&1 l$>in&*)/0.6>l$* -

)0.1& in&*)0.&1 l$>in&*)/0.2(>l$* ;/0.0B0>pc

Al#min#m 3 )0.(+ in&*)0.10 l$>in&*)/0.+2>l$* ;/0.02&>pc


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otal Cost rass3 /0.12B>pc < 0.0B0>pc ;

0.20B>pc

Al#min#m3 /0.0B(>pc < 0.0B02&>pc ;0.10,>pc

Choose al#min#m to minimi!etotal cost


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Mae vs. #y E5ample A company8 not operating at "#ll capacity8 is

considering maing a part c#rrently $o#ght.

Ma*e Bu&%irect Material $.!0

%irect +abor $.'!

,#erhea- #ariable $0.0

,#erhea- fie- $4.2!

otal 1nit Cost $.00 $3.!0


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Analysis 7tili!ing the e5cess capacity has no

opport#nity costs since the plant cannotinvest #n#sed capacity as easily as it caninvest #n#sed cash.

here"ore8 this prod#ct will not change5ed overhead "or the plant.

So the real cost per #nit is3 /1.+0 < /1.&+< /0.0 ; /&.,+ here"ore8 it is $etter to mae the prod#ct

in-ho#se.

EGG 307 Costs & Cash Flows 5-2016.ppt

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