UNIT - I Engineering Economics

UNIT - I

INTRODUCTION TO ECONOMICS

WHAT IS ECONOMICS?

Economics is a science that deals with production of goods , service , and distributing the same to human for their welfare and consumption.

GOALS OF ECONOMICS

A high level of employmentPrice stabilityEfficiency ( technical , economic )An equitable distribution of incomeGrowth

Flow in an Economy

Households and Business are the two major entities in an economy.

Business organisation use land, labour and capital of the households to produce consumer goods and service.

The household in turns payment for receiving the consumer goods and service

Thus a cyclic process exit between the two enitities.

LAW OF SUPPLY AND DEMAND

When there is decrease in the price of a product the demand of the product increases and its supply decreases

LAW OF SUPPLY AND DEMAND

The point of intersection of the supply curve and demand curve is known as equilibrium point.

At this point the price, the supply, and demand remain the same.

FACTOR INFLUENCING THE DEMAND

INCOME OF THE PEOPLEPRICES OF THE RELATED GOODSTASTE OF THE CONSUMER

FACTORS INFLUENCING THE SUPPLY

COST OF THE INPUTTECHNOLOGYWEATHERPRICES OF THE RELATED GOODS

DEFINITION OF ENGINEERING ECONOMICS

Engineering economics deals with the methods that enable one to take economic decision towards minimizing cost and or maximizing benefits to business organizations.

Scope of Engineering Economics

Provides base for understanding present worth and future worth.

Base for economic analysis.Base for R.O.IMake or Buy decisionInventory control

ELEMENTS OF THE COST

THE TWO TYPES OF COST ARE:

i. VARIABLE COST

ii. OVERHEAD COST.

VARIABLE COST

The variable cost are those which varies with the volume of production.

Variable cost is classified into

a. Direct material cost

b. Direct labour cost

c. Direct expenses

Direct labour cost - amount paid as wages to the labour involved in the production.

Direct material cost - cost of the material used in production of the product

Direct expenses – expenses that vary with the volume of production.

OVERHEAD COST

It is the sum of administrative overhead, selling overheads, distribution overhead.

Administrative overhead – cost involved in the administrating the business

Selling overhead – cost involved in the promotional activity and sales forces

Distribution overhead – total cost of shipping the item from factory to consumer.

OTHER TYPES OF COST

MARGINAL COST

Marginal cost is the cost of producing an additional unit of that product.

Eg. Let the cost of producing 20 units of product be Rs.10000 and the cost of producing 21 units of the same product be Rs.10045. Then the marginal cost is Rs.45.

Marginal RevenueMarginal revenue of a product is the incremental revenue of selling an additional unit of that product.

Eg. Let the revenue selling 20 units of a product be Rs.15000 and the revenue of selling 21 unit of the same product be Rs.15085. Then marginal revenue is Rs.85

Sunk cost

Sunk cost is the past cost of an equipments and asset.

Eg. If an equipments is bought for Rs.100000 and been sold after three years then the value of equipment is not as the same price.

Here the Sunk cost is Rs.100000.

Opportunity cost

Cost involved in not choosing the best alternatives is called as opportunity cost.

Eg. Let a person invested a sum of Rs.50000 in shares. The annual return is Rs.7500 then he have 57500 at the end of the year. If the same been invested in a bank paying 18% interest he would have got Rs.9000 as interest and Rs.59000 at the end. So the loss of money or the opportunity cost is 1500 (9000-7500)

Formula from break even analysis

Profit = sales – (fixed cost + variable cost) Fixed cost

Break even quantity = selling price –variable

cost

Break even sales = (F.C / S.P.- V.C) * selling price/unit

Contribution = sales – variable costsMargin of sales = actual sales – break even sales

P/v RATIO ANALYSIS

P/v ratio = (sales – Variable cost )/ sales

BEP = (fixed cost ) / (P/v Ratio)

M.S.= Profit / (P/v Ratio)

Contribution = sales - variable costs

Alpha Associates has the following details:

Fixed cost = Rs. 20,00,000

Variable cost per unit = Rs. 100

Selling price per unit = Rs. 200

Find

The break-even sales quantity,

The break-even sales

If the actual production quantity is 60,000,

find (i) contribution; and (ii) margin of safety by all methods

Consider the following data of a company for theyear 1998; Sales = Rs. 80,000 Fixed cost = Rs. 15,000 Variable cost = 35,000Find the following:

ContributionProfitBEPM.S.

TYPES OF EFFICENCY

Efficiency of the system is the ratio between the output to input.

Efficiency is classified into two types

Technical efficiency

Economic efficiency

Technical efficency

Technical efficency = heat equivalent of mechanical energy

produced

heat equivalent of fuel used

ECONOMIC EFFICENCY

WORTHECONOMIC EFFICENCY=

COSTWorth revenue generated by operating the business.Cost is the annual expense incurred in carrying the business

ECONOMICS ANALYSIS

Economics analysis is performed in day to day life for decision making

For example an industry sourcing for raw materials from nearby place or far away place the following facts are been noted

Price of raw materialTransportation costAvailability of the raw materialQuality of the raw material

EXAMPLE FOR SIMPLE ECONOMIC ANALYSIS

FOR AN INDUSTRY AS A WHOLE

Material selection for product

Design selection for product

Building material selection (transportation cost)

Process planning

MATERIAL SELECTION FOR PRODUCT

In the design of a jet engine part, the designer has a choice of specifying either an aluminium alloy casting or a steel casting. Either material will provide equal service, but the aluminium casting will weigh 1.2 kg as compared with 1.35 kg for the steel casting. The aluminium can be cast for Rs. 80.00 per kg. And the steel one for Rs. 35.00 per kg. The cost of machining per unit 150.00 for aluminium and Rs. 170.00 for steel. Every kilogram of excess weight is associated with a penalty of Rs. 1,300 due to increased fuel consumption. Which material should be specified and what is the economic advantage of the selection per unit?

DESIGN OF SELECTION FOR PRODUCT

Two alternatives are under consideration for tapered fastening pin. Either design will serve the purpose and will involve the same material and manufacturing cost except for the lathe and grinder operations.

Design A will require 16 hours of lathe time and 4.5 hours of grinder time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of grinder time per 1,000 units. The operating cost of the lathe including labour is Rs. 200 per hour. The operating cost of the grinder including labour is Rs. 150 per hour. Which design should be adopted if 1,00,000 units are required per year and what is the economic advantage of the best alternative?

BUILDING MATERIAL SELECTION PROBLEM

In the design of buildings to be constructed in Alpha State, the designer is considering the type of window frame to specify. Either steel or aluminum window frames will satisfy the design criteria.

Because of the remote location of the building site and lack of building materials in Alpha state, the window frames will be purchased in Beta State and transported for a distance of 2,500 km to the site. The price of window frames of the type required is Rs. 1,000 each for steel frames and Rs. 1,500 each for aluminium frames. The weight of steel window frames is 75 kg each and that of aluminium window frame is 28 kg each. The shipping rate is Re 1 per kg per 100 km.

Which design should be specified and what is the economic advantage of the selection?

Top Most Firing IT Companies in India!

1) IBM --- Right now this is the most firing company for IT professionals. In the last 6 months, this company has fired nearly 20% of their employees because of BG check and performance issues. This is the most insecure company from an IT professional's point of view. They don't have any strategic plans at HR policies regarding employee security. No appraisals (maximum 10%).


2) TCS --- Previously its an government IT Company . Now a days TCS also becoming firing IT company. Recently they fired on 500 people.( the people below 2 years of experience) and TCS lost so many projects recently( especially British Telecom Projects).


3) Accenture --- This is second top most firing company. The firing rate is around 5%. This depends upon outsourced projects; they have a unique system where Accenture development centers around the world bid for a project coming into the company. Currently Philippines centre is taking the cake and the Indian centers are in a firing mode.


4) WIPRO --- Firing people with very frequent back ground checks and firing them with out even experience letters and relieving letters (will mention as terminated from services)but will promise the employees that they will retain them. After the project is over they will fire away. Will threaten of criminal cases against such employees if they oppose the move and has also filed against some.


5) CTS --- Has a steady firing policy (checking the Educational background and previous employment and also employee performance in work). In a Recent HCL walk-in, around 50% attendees were from this company. Sadly the I-pods have not helped them.


5) CSC --- Excellent package but fires folks in Background check and those on bench regularly. Recently fired 400+ employees from its subsidiary Covansys.


6) Intel --- Recently joined the league. Running in heavy losses, hence firing 3000 employees in the Bangalore center in a phased out manner.

UNIT - I Engineering Economics

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