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CONFIDENTIAL

UNIVERSITI TUN HUSSEIN ONN MALAYSIA

SOLUTION
TEST 1
SEMESTER II
SESSION 2016/2017

COURSE NAME : ENGINEERING ECONOMY


COURSE CODE : BPK 30902
PROGRAMME : 3 BFF
EXAMINATION DATE : MARCH 2017
DURATION : 1 HOURS
INSTRUCTION : ANSWER TWO (2) QUESTIONS
ONLY

THIS QUESTION PAPER CONSISTS OF THREE (3) PAGES

CONFIDENTIAL
BPK 30902

SECTION A

Q1 (a) Twenty (20) years ago, your company has purchased a small factory
building costing RM 300,000. However, book value of the building
remains RM 230,000 only due to the decrease in market value. The factory
is sold at the price of RM 180,000.

Determine the value from each of the following cost;

(i) Cash Cost


(2 marks)

(ii) Book Cost


(2 marks)

(iii) Sunk Cost


(2 marks)

(iv) Opportunity Cost


(2 marks)

(v) Standard Cost


(2 marks)

Solution:
i. Cash Cost
Cash cost is a cash basis accounting cost recognition process that classifies costs as they are paid
for in cash, and is recognized in the general ledger at the point of sale.

- Cost of the factory building = RM 300,000 ............ 2 marks

ii. Book Cost


Book value of an asset is the value at which the asset is carried on a balance sheet and calculated by
taking the cost of an asset minus the accumulated depreciation. Book value is also the net asset
value of a company, calculated as total assets minus intangible assets (patents, goodwill) and
liabilities

- Total decrease value = RM 300, 000 – 230,000


= 70,000 ….............…. 2 marks
iii. Sunk Cost
a sunk cost is a cost that has already been incurred and cannot be recovered.

-Book value less Sold prices = 230,000 - 180,000


= RM 50,000 ....…...... 2 marks
iv. Opportunity Cost
A benefit, profit, or value of something that must be given up to acquire or achieve something else.
Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or
decision has an associated opportunity cost.

- Value of building sold = RM 180,000 .......…. 2 marks

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BPK 30902

v. Standard Cost
An estimated or predetermined cost of performing an operation or producing a good or service, under
normal conditions. Standard costs are used as target costs (or basis for comparison with the
actual costs), and are developed from historical data analysis or from time and motion studies.

- Fixed Depreciation = RM 7,000/20


= RM3,500.00 ......….. 2 marks

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BPK 30902

(b) A group of EE team is making analysis in a decision to produce a new


product with two alternative plants. Details are as follows:

Details Plant A Plant B


Labour Cost (RM per unit) 36.00 38.00
Raw Material Costs (RM per unit) 73.00 82.00
Factory Manager(RM per month) 6,600 5,800
Rental (RM per month) 7,800 6,300
Selling Price (RM per unit) 150.00 150.00

(i) Calculate the Total Variable Cost (VC)& Fixed Cost (FC)
(4 marks)

(ii) Determine the Breakeven Pointunits per month


(4 marks)

(iii) Suggest the most profitable plant for production if the


consumer demand is 500 units per month.
(4 marks)

(iv) The selling price has reduced by RM5.00 for site chosen in
(iii). Calculate how many units to be sold if the company is
to maintain a profit level of RM2,880.00
(3 marks)

Solution:

Details Plant A Plant B Marks


1. Variable Cost (VC)
Labour Cost (RM per unit) 36.00 38.00
Raw Material Costs (RM 73.00 82.00
per unit)
109.00 120.00 2
Fixed Cost (FC)
Rental (RM per month) 6,600 5,800
Factory Manager(RM per 7,800 6,300
month)
14,400 12,100 2

Selling Price (RM per unit) 150.00 150.00


2. Breakeven BEP = FC/ (SP – BEP = FC/ (SP –
VC) VC)
4
BEP = FC/ (SP – VC) = 14,400/(150 – 109) = 12,100/(150 – 120)
= 351.2195 units = 403.3333 units

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BPK 30902

3. Profitable site Production Cost Production Cost


Revenue RM150 x 500 = (109 x 500) + 14,400 (120 x 500) + 12,100
RM75,000 = 68,900 = 72,100
Profit = TR – TC Profit = TR – TC
= 75,000 – 68,900 = 75,000 – 72,100
4
= 6,100 = 2,900
Selected plant due
to higher profit &
lower BEP

4 SP 150 to 145 BEP = FC/ (SP – VC) BEP = FC/ (SP – VC)
2,880/(145 -109) = 80 = 14,400/(145 – 109) = 12,100/(145 – 120)
units = 400units = 484 units
480 x 145 = 69,600 BEP + Profit Level BEP + Profit Level
= 400 + 80 = 484 + 80
= 480 units = 564 units 3
(480 x 109) + 14,400
66,720
Profit Level = TR – TC
= 69,600 – 66,720
= 2,880

Q2 You are appointed as a contractor for Senai-Desaru Highway project. One of your
tasks is to set up the asphalt-mixing plant equipment which has a choice of three
sites. Three sites available are Cahaya Baru, Ulu Tiram and Tebrau. You estimate
that it will cost RM 5.40 per cubic yard mile (yd3-mile) to haul the asphalt-paving
material from the mixing plant to the job location. Refer to the table below for the
factors relating to these three sites.

Cost Factor Cahaya Baru Ulu Tiram Tebrau


(Faktor Kos)
Average hauling 7 miles 4 miles 3.3 miles
distance

Monthly rental of RM 3600 RM 10000 RM 9000


site

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BPK 30902

Cost to set up & RM 54000 RM 89000 RM 75000


remove Equipment
Hauling expense RM 5.40/yd3-mile RM 5.40/yd3-mile RM 5.40/yd3-mile

Flag person Not required RM 90/day Not Required

Authority Permit RM 500 RM 500 RM 1000

The job requires 50000 yd3 of mixed-asphalt-paving material. You are given by
your client to complete in five months (25 weeks of 6 working days per week).
The delivered of paving material is paid for RM 29 per yd3.
a) List fixed cost and variable cost from the cost factor listed in the table.
(2
marks)
Fixed cost – Monthly rent, Cost to set up and remove equipment, Flag
person and Authority permit (1.5 point)
Variable cost – Hauling expense (0.5 point)

b) Compute all fixed costs and variable cost for all three sites - Cahaya Baru,
Ulu Tiram and Tebrau. Which site will you choose and why?
(16 marks)
Cost Factor Cahaya Baru Ulu Tiram Tebrau
(Faktor Kos)
Monthly rent RM 3600(5) = RM RM 10000(5) = RM RM 9000(5) = RM
18000 50000 45000
Cost to set up & RM 54000 RM 89000 RM 75000
remove Equipment
Hauling expense RM 5.40(50000)(7) RM 5.40(50000)(4) RM
= RM 1890000 = RM 1080000 5.40(50000)(3.3) =
RM 891000
Flag person RM 0 RM 90(25)(6) = RM RM 0
13500
Authority Permit RM 500 RM 500 RM 1000
TOTAL RM 1962500 RM 1233000 RM 1012000
(5 points) (5 points) (5 points)
Site at Tebrau is choosen since the total cost is the lowest (RM 1012000) (1 point)

c) For each site - Cahaya Baru, Ulu Tiram and Tebrau, list Total Cost (TC)
equation correspond to the site. Hint: use linear equation y = mx + c
(3 marks)
Y = mx + c => TC = VCx + FC
Cahaya Baru => TC=(5.4)(7)x + 72500 = 37.8x + 72500(1 point)
Ulu Tiram => TC=(5.4)(4)x + 153000 = 21.6x + 153000 (1 point)
Tebrau => TC=(5.4)(3.3)x + 121000 = 17.82x + 121000 (1 point)

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BPK 30902

d) If Total Revenue (TR) is equal to Total Cost (TC), calculate how much
cubic yard you have to be delivered before you starting making a profit.
Compute ONLY the site you already chose in (b).
(4 marks)
Tebrau:
Total cost = Total revenue (1 point)
17.82x + 121000 = 29x (1 point)
11.18x = 121000 (1 point)
x = 10822.90 yd3 delivered. (1 point)