Problem 16.1 : COST EVALUATION

From Eq.(16.19) which adjusts cost for a size or capacity difference, 

 

a cyclone dust collector. Note that while the new unit has 10 times the capacity as the unit purchased in 1985 will not cost 10X more, because of economy of scale. However, the purchase cost will have increased because of inflation in the 22 years since it was purchased in 1985. Assuming cost inflation in of 5% per year, the original cost of $35,000 is now equivalent to .

The estimate of the cost is 

Note that this estimate does not include the cost of shipping, installation at the plant, and necessary electrical and mechanical auxiliaries. The best estimate of the cost would be a firm quotation from the supplier. A better estimate of the cost escalation from 1985 could be obtained using Eq.(16.18) with the producer price index (PPI) at www.bls.gov for the type of equipment involved, since an estimate of 5% inflation most likely overestimates the actual situation.

Problem 16.4 : COST EVALUATION

Prime cost

Direct labor                                                     950,000

Direct material                                                              2,150,000

Direct expenses                                                             60,000

Direct engineering                                           90,000

Direct engr. expenses                                                    30,000

                                                            3,280,000                               (1)

Factory expense

Plant utilities                                                   70,000

Plant & equip. depreciation                                           120,000

Warehouse expense                                        60,000

Taxes & insurance                                           50,000

                                                                        300,000                       (2)

General and administrative expenses (G&A)

Plant manager and staff                      180,000

Administrative salaries                        120,000

Office utilities                                     10,000

                                                            310,000                                               (3)

Manufacturing cost = (1) + (2) +(3) = 3,890,000                                          (4)

Sales  expense = 100,000                                                                               (5)

Total cost = (4) + (5) = 3,990,000                                           (6) this ignores corporate overhead, which should be small for a company of this size.

The problem states that the profit margin is 0.15 or 15%. One is tempted to multiply the total cost by 0.15 to get the profit, and add this to cost to find the selling price.

However, this is not strictly correct. By definition:

    But, from Equation  (16.2),

The unit selling price of turbine is

Problem 16.3 : COST EVALUATION

The type of tooling to make for a manufacturing process depends on the expected total quantity of parts. Tooling made from standard components and less wear-resistant materials (soft tooling) can be made more quickly and cheaply than conventional tooling made from hardened steel (hard tooling). Use the concept of break-even point to determine the production quantity for which soft tooling can be justified. The following cost data applies:

Soft tooling                             Hard tooling

Tooling cost                                                    C_S $600                                   C_H $7500

Setup cost                                                       S_S $100                                   S_H $60

Unit part cost                                                  C_PS $3.40                                C_PH $0.80

The total production run is expected to be 5000 units. Parts are made in batches of 500.

Answer:

The break-even point is the sales or production volume at which sales and costs balance.

C_H + {Q_BEP/b} S_H + C_PH Q_BEP = C_S + {Q_BEP/b} + S_S+ C_PS Q_BEP

Break-even point, Q_BEP = C_H - C_S / ({S_S - S_H}/b} + {C_{PS -} C_PH})

= 7500 – 600/ ({100 - 60}/500} + {3.4 – 0.8})

= 2574.63

= 2575 units

The break-even point gives the total production at which the hard tooling approach becomes more cost effective than soft tooling. Since the total production is 5000 units, the best decision is to use hard tooling if the time required to make to tools and prepare the production machines is compatible with the product development schedule.

The units for the basic equation above are: