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Chapter 1 Answers

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Problem (c) is most suitable, as data needs to be collected on the increased insurance premiums, and then a trade-off calculation needs to be done. In
the other two cases, the calculations are straightforward, and therefore they do not fall into the domain of engineering economic analysis.


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Situation (d) is the most suitable. Different insurance companies charge different rates, and their levels of customer friendliness and service might
also vary. Sufficient data needs to be gathered before you decide which company to choose. This problem satisfies the three conditions under which
engineering economic analysis can be useful, which are mentioned in page 5 of the text (important enough, requires data collection and analysis, and
has economic consequences). None of the other cases satisfy all these criteria.


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Not a single case can be considered as an example of rational decision making, although one may be tempted to select situation (c). Yet, in situation
(c), Don was guided ONLY by the cost, which is only ONE of the attributes of rational thinking. The fact that the wrench failed before the job was
completed is very relevant. In situation (a), the decision was completely irrational, and in situation (b), no alternatives were evaluated.


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$4,000 is spent by Willie Lohmann every 2 years. This is the depreciation on the car, as he gets a trade-in allowance of $8,000 when he buys a car for
$12,000.
$2,000 is therefore spent by Willie Lohmann every year towards depreciation on the car.
$0.14 is Willie Lohmann's operating cost per km.
29,000 km is the annual distance travelled by Willie Lohmann.
Compensation received by Willie Lohmann under Plan (a) every year = depreciation allowance every year + operating cost km driven annually
Depreciation allowance received by Willie = $2,000
Operating expenses at 14 per km for 29,000 km = $4,060
Total money received by Willie = $6,060 under Plan (a)
Under Plan (b), Willie receives $0.20 per km driven. No depreciation or other allowances are paid.
Money received by Willie under this plan = $5,800

Clearly Plan (a) is superior to Plan (b).

Let the annual distance traveled be x for Willie to get the same reimbursement under either Plan (a) or (b).
Then, equating the two amounts, we have

2,000 + 0.14 x = 0.2 x

where x = 2,000/0.06

= 33,333 km

The two methods give the same reimbursement if Willie travels 33,333 km annually. Thus, for annual distances greater than 33,333 km, it makes
sense for Willie to choose Plan (b).


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Predicted Values
Mathematics (M) Physics (P) Engineering Economy (EE) Math Physics EE
Study
hr Grade
Marginal
Increase
Study
hr Grade
Marginal
Increase
Study
hr Grade
Marginal
Increase Distrbn Avg. 12.5 + 7.5x 16.1 + 8.6x 37.8 + 7.8x
2 25 2 35 2 50 27.5 33.3 53.4
3 35 10 3 41 6 3 61 11 35.0 41.9 61.2
4 44 9 4 49 8 4 71 10 5,5,5 63.3 42.5 50.5 69.0
5 52 8 5 59 10 5 79 8 50.0 59.1 76.8
6 59 7 6 68 9 6 86 7 57.5 67.7 84.6
7 65 6 7 77 9 7 93 7 65.0 76.3 92.4
8 70 5 8 85 8 8 96 3 7,5,3 61.7 72.5 84.9 100.2



SOLVER SET-UP
Math Physics EE Total
Time 2 8 5 15
Grade 27.5 84.9 76.8
Average 63.07

Subject Grade vs Study Times
0
20
40
60
80
100
2 3 4 5 6 7 8
Study Time, hr
G
r
a
d
e
s
Maths
Physics
EE


If we assume equal effort in all subjects, the average grade works out to (52 + 59 + 79)/3 = 190/3 = 63.3
This initial condition is shown by the set of numbers highlighted in yellow.
Looking at the marginal increase column, the greatest benefit from increasing 1 hour of study is in physics, where the grade would go up by 9.
But this increase is offset by a decrease of total grade by 8 if study time in math or physics is decreased by 1 hour.
Let us therefore increase the effort in physics by 1 hour and reduce effort in math by 1 hour.
The new average works out to (44 + 68 + 79)/3 = 63.7
The new situation is shown in pink for math and physics; for engineering economy the situation is unchanged.
If we now increase study in physics by 1 hour, the grade moves up by 9.
Decreasing study time by 1 hour in math reduces the grade by 9, while decreasing study time by 1 hour in engineering economy reduces the grade by
8.
So we increase study time in physics to 7 hours, and reduce it to 4 hours in engineering economy.
This new situation is shown in green for physics and engineering economy; the math value remains unchanged.
The new average works out to (44 + 77 + 71)/3 = 64.0
From here, any increase in the study of physics will result in a greater corresponding decrease in math or engineering economy grade.
Hence we conclude that the optimum study time distribution is 4 hours for math, 7 hours for physics, and 4 hours for engineering economy,
resulting in an average grade of 64.0.


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Each company can save on 2 trips.
Drivers charges per trip = $185
Distance per trip = 300 km, as the distance one way is 150 km and we need to consider a full trip
Operating charges per km = $0.375
Operating charges per trip = $112.50
Total cost per trip = $297.50
Total savings per week = $595.00

Each company could therefore save $595.00 per week if they haul the other companys cargo on the return trip.


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Table 1 Table 2
Weekly order Cost
price ()
Selling
price ()
Packages
sold/week
Less than 1,000 35 60 300
1,0001,499 28 45 600
1,5001,999 25 40 1,200
2,000 or more 20 33 1,700
26 2,300

For each of the five cases in Table 2, we can find the corresponding cost and the revenue earned, then calculate the profit margin.
We can select that selling rate that will maximize the profit.

Selling
price ()
Packages
sold/week
Total
revenue
($)
Cost/package
()
Total
cost ($)
Profit
($)
60 300 180 35 105 75
45 600 270 35 210 60
40 1,200 480 28 336 144
33 1,700 561 25 425 136
26 2,300 598 20 460 138

Thus, 1,200 packages can be purchased at 28 per package and sold at 40 per package.


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Time period Duration
(hours)
Sales ($) Material
cost ($)
Labour
cost ($)
Profit/loss
($)
0600 to 0700 1 20 14 10 4
0700 to 0800 1 40 28 10 2
0800 to 0900 1 60 42 10 8
0900 to 1200 3 200 140 30 30
1200 to 1500 3 180 126 30 24
1500 to 1800 3 300 210 30 60
1800 to 2100 3 400 280 30 90
2100 to 2200 1 100 70 10 20
2200 to 2300 1 30 21 10 1
2300 to 2400 1 60 42 10 8
2400 to 0100 1 20 14 10 4

From the table, it is clear that the first and last hours of operation result in a net loss when cost of goods sold and labour is deducted from sales.
In the period 2200 to 2300, there is a loss of $1, but this is offset during the next hour.
For every other time period, there is a clear profit.
Thus, to maximize profits, the store should open at 0700 and close at 2400 (midnight).