CHAPTER 11 Solutions Manual

For

Basics of Engineering Economy, 1e

Leland Blank, PhD, PE
Texas A&M University
and
American University of Sharjah, UAE

Anthony Tarquin, PhD, PE

University of Texas at El Paso

PROPRIETARY MATERIAL.
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11- 1

Chapter 11
11.1

Cost Component
Gasoline
Garage rental
License plate fee
Insurance
Tires
Inspection fee
Oil change

Type of Cost
Direct
Indirect
Indirect
Indirect
Direct
Indirect
Direct

11.2 In the bottom-up approach, the output variable is the required price and the input
variable is the cost estimate.
11.3 In the top-down approach, the starting point is the competitive price.
11.4 Conceptual design stage estimates are called order-of magnitude estimates and
they should be within 20% of the actual cost.
11.5 Cost = 4500(500) = $2,250,000
11.6 Cost/volume = 185/[(1 ft2)(10 ft)] = $18.50
11.7 Height = 114/7.55 = 15.1 feet
11.8 Cost in El Paso = 10,500(800)(0.769)
= $6,459,600
Cost in LA = 10,500(800)(1.085)
= $9,114,000
11.9 From Table 11-3, index value in 2001 = 6343; index value in mid-2006 = 7700
Ct = 30,000,000(7700/6343)
= $36,418,098
11.10 To have index value of 100 in year 2000, must divide by 62.21.
(a) New index value in 1990 = 4732/62.21
= 76.0649
(b) New index value in 2005 = 7446/62.21
= 119.6914
11.11 At 1% per month, annual increase = (1 + 0.01)12 -1 = 12.68%
Index value = 100(1.1268) = 112.68

11- 2

11.12

Cost2006 = cost2001(1333.4/1093.9)
328 = cost2001(1.2189)
Cost2001 = $269

11.13

Value in NY = 54.3(12,381.40/4874.06) = $137.94 million

11.14

CCI in 1967 = 7879.58/7.3355 = 1074.17

11.15 Set f = inflation rate

(a) f = (7882.53 - 7562.50)/ 7562.50 = 4.23%
(b) f = (7879.58 7882.53)/ 7882.53 = -0.038%
11.16

95.90 = (Cost in 1913)(2583.52/100)

Cost in 1913 = $3.71 per ton

11.17

31.39 = (Rate in 1913)(16,520.53/100)

Rate in 1913 = $0.19 per hour

11.18 From Equation [11.2]

464.49 = 400(2583.52/I0)
I0 = 2224.82
11.19 C2 = 58,890(2/0.75)0.58 = $104,017
11.20 20,000 = C1(300/100)0.61 = 1.9545C1
C1 = $10,233
11.21 1.52C1 = C1(68/30)x
log 1.52 = x log 2.267
x = 0.51
11.22 Area of 12 pipe = (1)2/4
= 0.785 ft2
Area of 24 pipe = (2)2/4
= 3.142 ft2
27.23 = 12.54(3.142/0.785)x
2.17 = 4.00x
log 2.17 = x log 4
0.336 = 0.602x
x = 0.56

11- 3

11.23 Use Equation [11.4]

Cost = 1.2[300,000/100,000)0.67](575.8/394.3)
= $3.658 million
11.24 Cost = 3750(2)0.89 (1104.2/1520.6) = $5046
11.25 Let C1 = cost in 1998; From Table 11-3, M & S index values are 1061.9 in
1998 and 1244.5 in 2005.
376,900 = C1(1244.5/1061.9)(4)0.61
C0 = $138,057
11.26 CT = 2.25(1,800,000) = $4,050,000
11.27 1,320,000 = h(225,000)
h = 5.87
11.28 2,300,000 = (1 + 1.35 + 0.41)CE
CE = $833,333
11.29 CT = [400,000(1 + 3.1)][1 + 0.38]
= $2,263,200
11.30 Use a 0.9 learning rate for each doubled production. (Times are rounded.)
Unit 2: 4 00/0.9 = 444 hours
Unit 1: 444/0.9 = 494 hours
Unit 8: 400(0.9) = 360 hours
Unit 16: 360(0.9) = 324 hours
Unit 32: 324(0.9) = 292 hours
11.31 (a) s = log 0.92/log 2 = -0.0362/0.3010 = -0.120
(b) s = log 0.86/log 2 = -0.0655/0.3010 = -0.2176
11.32 s = log 0.90/log 2 = -0.152. Use Equation [11.8) for TN.
TN = 90(N)-0.152
Unit, N
1
25
50
100
175

TN
90.0
55.1
49.7
44.7
41.0

11- 4

Spreadsheet graphs using arithmetic and log-log scales follow.

11.33 Same logic as in the previous problems, except s = log 0.95/log 2 = -0.074. If CN is
the cost for unit N,
CN = 3000(N)-0.074
Spreadsheet graphs using arithmetic and log-log scales follow.

11.34 (a) s = log 0.88/log 2 = -0.184

T4 = 160(4)-0.184 = 123.9 hours
Learning curve model predicts 6 hours less than actual time.
(b) T50 = 160(50)-0.184 = 77.9 hours

11- 5

(c) Sum T1 through T10 and divide by 10.

Unit
1
2
3
4
5

Time Unit Time

160.0
6
115.1
140.8
7
111.8
130.7
8
109.1
124.0
9
106.8
119.0 10 104.7

Sum = 1222
Average time per unit = 1222/10 = 122.2 hours
(d) Cost = total hours for 5 units (100) = 674.5(100) = $67,450
11.35 (a)

(b)

North: Miles basis; rate = 300,000/350,000 = 0.857 per mile

South: Labor basis; rate = 200,000/20,000 = $10 per hour
Midtown: Labor basis; rate = 450,000/64,000 = $7.03 per hour
North: 275,000(0.857) = $235,675
South: 31,000(10) = $310,000
Midtown: 55,500(7.03) = $390,165
Total distributed is $935,840 or 78% of the allocation. Spreadsheet follows;
distribution is larger due to significant digits carried by Excel.

11.36 Determine AW for make and buy alternatives. Make has annual indirect costs.
Make: Indirect cost computation
Dept
M
P
Q
$/year

Rate
(1)
$2.40
$0.50
$25

Usage
(2)
450,000
850,000
3500

11- 6

Annual cost
(3) = (1)(2)
$1.08 million
425,000
87,500
$1,592,500

AWmake = -3,000,000(A/P,12%,6) + 500,000(A/F,12%,6) 1,500,000 1,592,500

= -3,000,000(0.24323) + 500,000(0.12323) -3,092,500
= $-3,760,575
AWbuy = -3,900,000 300,000(A/G,12%,6)
= -3,900,000 300,000(2.1720)
= $-4,551,600
Select make alternative. Spreadsheet solution follows.

11.37 Engineering: without indirect costs

PW = -1,500,000 + 500,000(P/A,10%,5)
= -1,500,000 + 500,000(3.7908)
= $395,400
Project is justified
Finance: with indirect costs
Indirect costs: Dept A; 1.30(100,000) = $130,000 per year
Dept B; tabulated below
Year
1
2
3
4
5

Rate
9
10
11
12
13

Usage $/year
5000 $45,000
5500
55,000
6000
66,000
6500
78,000
7000
91,000

PW = -1,500,000 + 500,000(P/A,10%,5) 130,000(P/A,10%,5)

- [45,000(P/F,10%,1) + 55,000(P/F,10%,2) + ]
= -1,500,000 + 370,0000(3.7908) [245,723]
= $-343,127
Now, project is not justified.
Project is not justified when indirect costs are considered.
Spreadsheet solution follows.
11- 7

11.38 With technological advances, the traditional method and bases, especially, direct
labor hours, do not distribute indirect costs accurately enough. ABC supplements
traditional allocation, plus its help in tracing costs for analysis purposes.
11.39 Determine the rates by basis, then distribute the $900,000.
Total usage
Materials cost
$51,300
Previous build time 1395 p-hrs
New build time
1260 p-hrs
Example allocation for Texas.

Rate
$17.544/$
645.16/p-hr
714.29/p-hr

Materials cost: 17.544(20,000) = $350,880

Previous build time: 645.16(400) = $258,064
New build time: 714.29(425) = $303,573
Allocation by each basis
Materials cost Previous build time New build time
TX
$350,880
$258,064
$303,573
OK
222,809
267,741
253,573
KS
326,318
374,193
342,859
Total
$900,007
$899,998
$900,005
11.40 Activity is lost baggage handling; cost driver is number of bags handled.
11.41 Total bags handled = 4,835,900
Allocation rate = 667,500/4,835,900 = $0.13803 per bag handled
= approximately 13.8 per bag checked and handled

11- 8

Bags handled
DFW 2,490,000
YYZ
1,582,400
MEX
763,500

Allocation
$343,695
218,419
105,386

11.42 Compare last years allocation based on flight traffic with this years based on
baggage traffic. Significant change took place.
Last year;
This year;
flight basis baggage basis
DFW $330,000
$343,695
YYZ
187,500
218,419
MEX 150,000
105,386

Percent
change
+4.15%
+16.5
-29.7

Problems for Test Review and FE Exam Practice

11.43 Answer is (b)
11.44 Percentage of total cost = 34/114 = 29.8%
Answer is (b)
11.45 Answer is (c)
11.46 49.20 = C0(2583.52/2150)
C0 = $40.94 per foot
Answer is (a)
11.47 41.40 = 30.65(7458.80/I0)
I0 = 5522.03
Answer is (c)
11.48 C2 = 22,000(500/200)0.64 = $39,546
Answer is (d)
11.49 120,000 = 80,000(2)x
log 1.5 = x log 2
0.1761 = 0.31013x
x = 0.585
Answer is (b)
11.50 CT = 2.96(390,000) = $1,154,400
Answer is (c)
11.51 CT = (1 + 1.82 + 0.31)(650,000)
CT = $2,034,500
Answer is (a)

11- 9

11.52 s = log 0.96/log 2 = -0.0177/0.30103 = -0.059

Answer is (b)
11.53 s = log 0.95/log 2 = -0.0222/0.30103 = -0.074
T10 = 24.5(10)-0.074 = 20.66 seconds
Answer is (a)
11.54 Answer is (c)
11.55 Answer is (d)
11.56 Allocation = (900 + 1300)(2000) = $4.4 million
Percent allocated = 4.4/8.0 million = 55%
Answer is (c)
11.57

Answer is (a)

11- 10