Manufacturing Cost =

Cost Classification Fixed Costs+Variable Costs

# Fixed costs
Selling Price
‚ Investment costs (interests and depreciation on capital
investment - tooling, property tax, insurance)
Manufacturing Cost Distribution Cost Retail Cost ‚ Overhead costs (technical services/engineering,
nontechnical services/office personnel, general supplies)
‚ Management expenses (corporate management, legal
The selling price may be twice the manufacturing cost. staff, R&D staff)
‚ Selling expenses (sales force, delivery and warehouse
Manufacturing cost can be classified into fixed costs costs, technical service stall)
and variable costs; manufacturing cost can also be # Variable costs
divided into direct costs and indirect costs. ‚ Materials, and purchased parts
‚ Direct labour, quality-control staff
‚ Maintenance cost
‚ Power/energy and utilities
‚ Packaging and storage costs
‚ Royalty/licensing payments

Manufacturing Cost = Components: Purchasing or Making?

Direct Costs + Indirect Costs For components used in your product, you can:
# Purchase finished components from a vendor
# Direct Costs (off-the-shelf)
‚ Piece parts
# Have a vendor produce components designed
• Materials, tooling, setup, processing =>custom parts
• Purchased parts (OEM)
In-house (out-sourcing)
‚ Assembly # Manufacturing components In-house (In-house)
• Labour (salaries and benefits)
• Tooling Factors affecting the decision:
# Indirect Costs # Cost of the components
‚ Overhead (administration, engineering, secretarial, # In-house production capacity
utilities, capital, insurance, etc.)
# Quality and experience
‚ Selling expenses (marketing, technical support etc.)
# Transportation costs
 Cost Estimate Methods for Cost Estimate - Industrial
Manufacturing a Product Engineering Approach
# Industrial Engineering Approach:
‚
Costs of one DC Motor Controller at a Production
Separate elements of work are identified and summed Volume of 1000 per year
into total cost per part
# Analogy: Operations Material Labour Overhead Total
‚ Future costs of a design are based on past costs of a Elec. parts 15.36 0.20 0.45 15.01
similar design (needs similar experience or published
cost data) PCB assembly 0.52 2.23 0.33 3.08
# Statistical Approach: Testing 0.21 0.34 0.76 1.31
‚ Establish costs and initial parameters of the products Packaging 0.44 0.15 0.09 0.68
such as power, weight, speed etc
TOTAL 20.08
Cost = 013937
. x 0.7435
1 x 0.0775
2

Product Pricing - Break-Even Chart Break-Even Chart

(A Simplified Approach)
A break-even chart is designed to show graphically
the profits and losses on a product’s selling price
and manufacturing costs: $ v.s. production units

# Determine the variable cost per product

# Determine the fixed cost (global)
# Draw the total cost as a function of product units
# Determine the sale price of the product, and
draw the sales as a function of product units
# Determine the break-even point
 Introduction to the Concept of Engineering Decisions Involve
Engineering Economics Trade-offs
# Present and future worth Factors to Consider
‚ Interest/discount rate, compounding
# Function
# Series payment
‚
# Quality
Sinking fund
‚ Capital recovery factor # Cost/benefits
# Comparison of alternatives # Time
‚ One of the methods: present worth method
# Environmental/social impacts

Questions Present and Future Worth of Money

# If you have a choice of having $100 today or # P= amount of money today (Present Value)
$100 a year later, what would you like to # F= future amount (Future Value)
choose?
# N= number of interest periods
# Considerations: risks, lost opportunities, inflation,
# i= interest rate (%) (“rent”): F=P+Pi or F=P(1+i)
benefits etc.
‚ Simple interest: F(N)=P(1+Ni)
# If you have a choice of having $100 today or ‚ Compound interest: F(N)=P(1+i)N
$130 a year later, what would you like to
choose? Need some help with the decision.
# We will introduce some concepts to help with the
decision
Compound Interest v.s. Simple Interest
Interest = 10% per annum
800
Compound interest
600
400
200
0 Simple interest
0 5 10 15 20
Present Worth
The present value of the future money by a
discounting rate
# P=F(1+i)-N
# What the present sum will yield $1000 in 5 years
at an interest rate of 10% per annum?
‚ P=$1000(1+0.1)-5=$620.9
# Normal interest: an annual rate which may
compound at a different period;
# Effective interest: equivalent annual rate
‚ A credit card has a normal rate of 18% compounded
monthly. What is the effective rate?
‚ ieff=(1+0.18/12)12-1=19.56%
Power of Compounding
Interest rate and time are very important
# In 1626, Willem Verhulst paid $24 to purchase
Manhattan Island from the Canarsie Indians. If
the company had invested the $24 in a savings
account that earned 8% interest per annum, how
much would it have been worth in 2004?
‚ P = $24, i = 8%, N = 378 years
‚ Simple F = $24 [1 + (0.08*378)]=$750
‚ Compound F = $24(1 + 0.08)378 =$103.4 trillion
# If the interest is 6%:
‚ Simple F = $24 [1 + (0.06*378)]=$568
‚ Compound F = $24(1 + 0.06)378 =$0.0883 trillion
Series Payment
# A - the amount of a regular end-of-period payment
# Total future value after N payments at interest (i)
‚ F=A+A(1+i)+A(1+i)2+...+A(1+i)N-2+A(1+i)N–1
A[(1 + i ) N − 1]
F=
i
# Sinking fund: what regular series payments are
necessary to acquire a given future amount?
# My daughter is 7 years old. How much per year I
need to put into an investment account earning
5%/year to fund her 4-year education starting
2016? (assuming $20000/year is needed in 2016)
‚ A=Fi/[(1+i)N-1]=4x$20000x0.05/[(1+0.05)11-1]=$5631
 Capital Recovery Comparison of Alternatives
# My daughter is 7 years old. How much per year I
There are several ways to compare alternative
need to put into an investment account earning investments (i.e. project costs)
5%/year to fund her 4-year education starting 2016? - engineering decision?
(assuming the cost of education is $13000 per year
now and is increasing at 6%/year) # Present worth
# Need to find the future value of 4 year education; # Annual cost
and to find the regular payment (sinking fund) # Rate of return
# P=$13000x4=$52000, N=11: # Benefit-cost analysis
F=P(1+i)N=$52000x(1+0.06)11=$98712;
# A=Fi/[(1+i)N-1]=$98712x0.05/[(1+0.05)11-1]=$6948
# Capital Recovery: A=P[i(1+i)N]/[(1+i)N-1]

Example: Payback and Discount

Present Worth Comparison
# The installation of a new sprinkler system will
#
save $11,000 per year in insurance. The
The costs associated with each alternative
installed cost of the new system is $42,000.
investment are all converted to a present sum of
money (present worth), and the least of these # What is the payback period (i.e. the investment is
values represents the best alternative recovered from the savings)?
‚ Identify all costs and the time of their occurrence ‚
Simply payback: N=$42000/$11000=3.8 - not accurate
‚ Identify discount rate ‚
Payback at discount rate of 10%/year
‚ Calculate the present worth for all alternatives Year-1 Year-2 Year-3 .........
‚ Compare the results and select the best alternative $11000 $11000/(1+0.1) $11000/(1+0.1)2
Capital recovery:A=P[i(1+i)N]/[(1+i)N–1] A=$11000,
P=$42000, I=10%, N=????
===>N=5
 Example: Present Worth Comparison
Two alternative capital investment plans. Which is more
economical if money is worth 12%/year or 3%?
- Compare the present worth of options. The option with
the lowest present worth costs less, and is the best
For Water Supply
3% Case
# Present worth of regular payments:
P=A [(1+i)N– 1]/[i(1+i)N] (A=1000 or 50000; i=3%)
# Present worth (Plan A) = P+1000[(1+i)40-1]/[i(1+i)40]=
$1000000+$1000x23.115=$1,023,115
# Present worth (Plan B) = P+50000[(1+i)40-1]/[i(1+i)40]+
$75000/[(1+i)20]=
$200000+$50000x23.115+$75000x0.5537
=$1,397,276
Plan A has a lower present worth
Plan A is a better (lower-cost) alternative
12% Case
# Present worth of regular payments:
P=A [(1+i)N– 1]/[i(1+i)N] (A=1000 or 50,000; i=12%)
# Present worth (Plan A) = P+1000[(1+i)40-1]/[i(1+i)40]=
$1000000+$1000x8.2438=$1,008,244
# Present worth (Plan B) = P+50000[(1+i)40-1]/[i(1+i)40]+
$75000/[(1+i)20]=
$200000+$50000x8.2438+$75000x0.01075
=$612,996
Plan B has a lower present worth
Plan B is a better (lower-cost) alternative
Design for the Environment (DFE)
# What is DFE?
# A framework for integrating life cycle
environmental performance considerations,
costs, functional performance, quality, durability,
cultural, legal, and technical criteria into the
design and development of products, processes,
and services.
 Traditional Design Concerns
# In typical traditional design approach, designers
were to consider several technical parameters
such as:
• Product performance
• Manufacturing costs
• Product liability/safety
Without considering environmental
concerns...
#
If a professional designer decides not to consider
environmental issues at the designing stage, the
potentioal risks would be:
• Loss of natural resources
• Decrease in biodiversity
• Degradation of water quality
• Degradation of air quality
• Loss of reusable and recyclable materials
• Climate change
• etc
Environmental Issues in Design
# In an environmental conscious world, professioal
designers face more challenges in the designing
stage. Designers are required to take into
consideration environmental concerns such as:
• Resource depletion
• Energy efficiency
• Recyclability
• Hazardous or harmful environmental releases
• Life cycle costs
Definitions - Life Cycle Related
# Product Life Cycle : “Cradle-to-Grave”
# The stages of a product's life, beginning with raw
material acquisition and continuing through
processing, materials manufacture, and product
fabrication, and concluding with product
consumption and any of a variety of waste
management options.
‚ extracting and processing raw materials & energy
‚ manufacturing (product fabrication, and
filling/packaging steps)
‚ transportation and distribution
‚ use, re-use and maintenance
‚ recycling
‚ final disposal
 Definitions - cont’d
# Life Cycle Assessment (LCA) :
What Does LCA Address?
A concept and a method to evaluate the
# Environmental impacts of the system under study
environmental effects of a product or activity
holistically, by analyzing its entire life cycle. in areas of
‚ ecological health
# This includes ‚ human health
‚ Identifying and quantifying energy and materials used ‚ resource depletion
‚ Identifying and quantifying wastes released to the # Does not address
environment
‚ economic considerations, or
‚ Assessing the environmental impact of wastes
‚ social effects
released
‚ Evaluating opportunities for improvement.

The life cycle assessment consists of four

complementary components -initiation, inventory, impact,
and improvement.

Life Cycle Assessment Life Cycle Inventory

# Electricity production from coal

Goal Definition
Impact and
Improvement
Scoping
Assessment Assessment

Inventory
 Product Concept/Need Improvement Strategies Product Life Cycle

- Function - Material Choices INPUTS OUTPUTS

- Reformulation

Life Cycle Inventory - Performance

- Quality
- Safety and Health
- Cost
- Process
Improvement
- Material Intensity
Material
Inputs
Energy
Inputs
- Emissions to
Air
- Effluents to
- Environmental Reduction Water
Legal, and - Disassembly - Wastes
Regulatory - Recyclability (Solid/Liquid)
Requirement - Utility Raw Material
- Noise and
- etc. - Energy Efficiency Acquisition Vibration
- Durability - Other
- Maintainability Releases
- etc. - Useful
Manufacturing
Products

Use / Reuse /
Maintenance
Regulatory or
Voluntary
Standards

Disposition

Resource Conservation
I
Pollution Prevention Resource Depletion
Human Health
Ecological Health
Improvement Strategies Other

Env. Impact Assessment

Design Option Eval.

Life Cycle Stages
Initial
Design
Environmental
Profile
and
Objectives Design Options
Improvement
Other Strategies
Design
Considerations
---Cost Life Cycle
--Function Checklists
---etc.

Optimize Decision
Product Option
Design Assessment

Environmental
Releases to Air,
Water and Land

Input of Eenergy and Water