Wednesday, 15 May 2013

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.

Monday, 13 May 2013

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                                                    CS $600                                   CH $7500
Setup cost                                                       SS $100                                   SH $60
Unit part cost                                                  CPS $3.40                                CPH $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.
CH + {QBEP/b} SH + CPH QBEP = CS + {QBEP/b} + SS+ CPS QBEP
Break-even point, QBEP = CH - CS / ({SS - SH}/b} + {CPS - CPH})
= 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: