CE40/C1

B2 August 16, 2018

FADRIGALAN. GJOEDIT EART (LISBOA)
2013105761 CEM/3

ASSIGNMENT

CPR # 1

Terminologies:

1. Economics – a branch of science dealing with the production, consumption, and transfer of
resources

2. Engineering Economy – a subset of economics with the use and application of economic principle
in the analysis of engineering decisions. Eugene L. Grant is considered to be the Father of
Engineering Economy.

3. Engineering Economic Analysis – a part of Engineering Economics which serves to determine the
difference between fixed and incremental costs of certain operations, but also calculates that
cost, depending upon a number of variables and a number of other uses. Though Grant is
considered the Father of Engineering Economics, Arthur M. Wellington is considered to have
founded it.

4. Consumer Goods / Services - products bought for consumption by the average consumer.
Alternatively called final goods, consumer goods are the end result of production and
manufacturing and are what a consumer will see on the store shelf.

5. Producer Goods / Services - also called intermediate goods, in economics, goods manufactured
and used in further manufacturing, processing, or resale. Producer goods either become part of
the final product or lose their distinct identity in the manufacturing stream. This includes raw
materials such as copper.

6. Necessities - products and services that consumers will buy regardless of the changes in their
income levels, therefore making these products less sensitive to price change.
7. Luxuries - a good for which demand increases more than proportionally as income rises, and is a
contrast to a "necessity good", where demand increases proportionally less than income.

8. Demand - an economic principle referring to a consumer's desire and willingness to pay a price
for a specific good or service.

9. Supply - fundamental economic concept that describes the total amount of a specific good or
service that is available to consumers.

10. Elastic Demand – demand that are affected by price changes, the more elastic it is, the higher
the effect of price change on the demand.

11. Inelastic Demand – demands that are unaffected by price changes, regardless of the price the
demand will remain the same.

12. Unitary Elasticity – when the ratio between price change and demand is equal to 1.

13. Perfect Competition - the situation prevailing in a market in which buyers and sellers are so
numerous and well informed that all elements of monopoly are absent and the market price of a
commodity is beyond the control of individual buyers and sellers.

14. Monopoly – a market structure characterized by a single seller, selling a unique product in the
market.

15. Oligopoly - a state of limited competition, in which a market is shared by a small number of
producers or sellers.

16. Law of Supply and Demand – The law of supply and demand is a theory that explains the
interaction between the supply of a resource and the demand for that resource. The theory
defines the effect that the availability of a particular product and the desire (or demand) for that
product has on its price. Generally, low supply and high demand increase price. In contrast, the
greater the supply and the lower the demand, the price tends to fall.
 17. Law of Diminishing Returns – used to refer to a point at which the level of profits or benefits gained
is less than the amount of money or energy invested.

18. Valuation - an estimation of something's worth, especially one carried out by a professional
appraiser.

Enumerate and give a brief description for each:

1. Functions and Uses of Engineering Economy
a. Value Analysis - Functional analysis, value analysis and value engineering are used to
change production methods and/or reduce expected costs so the target is met.
b. Linear Programming - a method to achieve the best outcome (such as maximum profit or
lowest cost) in a mathematical model whose requirements are represented by linear
relationships.
c. Critical path analysis (CPA) - a technique that identifies the activities necessary to
complete a task, including identifying the time necessary to finish each activity and the
relationships between the activities.
d. Depreciation and Valuation – Depreciation is the decrease in value of assets, Valuation is
determining the value of assets.
e. Capital Budgeting - Capital budgeting is the process in which a business determines and
evaluates potential expenses or investments that are large in nature.
f. Risk, Uncertainty, and Sensitivity Analysis – analysis of risk versus rewards.
g. Fixed, Incremental, and Sunk Costs – analysis of the different costs a company has to take,
will take, and may already be taking.

2. Engineering Economy Techniques

a.

3. Engineering Economic Analysis Procedures

a. Problem Recognition, Definition, and Evaluation – understand what a problem is, how to
solve it, and at what priority you should place it at.
b. Development of Feasible Alternatives – check if there are more efficient solutions than the
ones you have already thought of.
c. Development of the outcomes and cash flows for each alternative – calculate for the
estimated results of the alternatives you have thought of, to understand if they are truly
more efficient.
 d. Selection of a criterion – choose which criteria you’ll be basing your solution from, such as
price, quality, quantity, etc.
e. Analysis and Comparison of the Alternatives – after thorough calculation of the
alternatives you’ve thought of, check and compare which is the most preferable
according to the situation.
f. Selection of the preferred Alternatives – making the choice between the stated
alternatives.
g. Performance monitoring and post monitoring results – checking of the solution’s
performance, if it is truly effective, and if it can be made better based on the data
gathered.

4. Intangible Values
a. Customer Experience – such as the usability of a device or service on a flight.
b. Brand - the identity and reputation of a product or business.
c. Organizational Culture - a business with a productive and creative organizational culture
that regularly produces innovation where others struggle.
d. Talent in areas such as leadership, design, engineering, marketing and sales.
e. Know-how - practical knowledge that allows you to do real things.
f. Intellectual Property Intellectual property such as trade secrets, designs, patents,
copyright, trademarks and trade dress.
g. Relationships – connections with customers, employees, partners and communities.

5. Costs
a. A fixed cost is constant, independent of the output or activity level. The annual cost of
property taxes for a production facility is a fixed cost, independent of the production level
and number of employees.
b. A variable cost does depend on the output or activity level. The raw material cost for a
production facility is a variable cost because it varies directly with the level of production.
c. The total cost to provide a product or service over some period of time or production
volume is the total fixed cost plus the total variable cost, where:
d. Total variable cost = (Variable cost per unit) (Total number of units)
e. A marginal cost is the variable cost associated with one additional unit of output or
activity. A direct labor marginal cost of $2.50 to produce one additional production unit is
an example marginal cost.
f. The average cost is the total cost of an output or activity divided by the total output or
activity in units. If the total direct cost of producing 400,000 is $3.2 million, then the average
total direct cost per unit is $8.00.
 g. The breakeven point is the output level at which total revenue is equal to total cost. It can
be calculated as follows:
BEP = FC/(SP - VC)
where
BEP = breakeven point
FC = fixed costs
SP = selling price per unit
VC = variable cost per unit
h. A sunk cost is a past cost that cannot be changed and is therefore irrelevant in
engineering economic analysis. One exception is that the cost basis of an asset installed
in the past will likely affect the depreciation schedule that is part of an after-tax economic
analysis. Although depreciation is not a cash flow, it does affect income tax cash flow.
Three years ago, an engineering student purchased a notebook PC for $2,800. The student
now wishes to sell the computer. The $2,800 initial cost is an irrelevant, sunk cost that should
play no part in how the student establishes the minimum selling price for the PC.
i. An opportunity cost is the cost associated with an opportunity that is declined. It represents
the benefit that would have been received if the opportunity were accepted. Suppose a
product distributor decides to construct a new distribution center instead of leasing a
building. Leasing a building immediately would have resulted in a $12,000 product
distribution cost savings during the next 6 months while the new warehouse is being
constructed. By forgoing the warehouse leasing alternative, the distributor experiences an
opportunity cost of $12,000.
j. A recurring cost is one that occurs at regular intervals and is anticipated. The cost to
provide electricity to a production facility is a recurring cost.
k. A nonrecurring cost is one that occurs at irregular intervals and is not generally
anticipated. The cost to replace a company vehicle damaged beyond repair in an
accident is a nonrecurring cost.
l. An incremental cost represents the difference between some type of cost for two
alternatives. Suppose that A and B are mutually exclusive investment alternatives. If A has
an initial cost of $10,000 while B has an initial cost of $12,000, the incremental initial cost of
(B - A) is $2,000. In engineering economic analysis, we focus on the differences among
alternatives, thus incremental costs play a significant role in such analyses.
m. A cash cost is a cash transaction, or cash flow. If a company purchases an asset, it realizes
a cash cost.
n. A book cost is not a cash flow, but it is an accounting entry that represents some change
in value. When a company records a depreciation charge of $4 million in a tax year, no
money changes hands. However, the company is saying in effect that the market value
of its physical, depreciable assets has decreased by $4 million during the year.
o. Life-cycle costs refer to costs that occur over the various phases of a product or service life
cycle, from needs assessment through design, production, and operation to decline and
retirement.
6. Overlapping Costs

7. Payments
a. Exchanging - an agreement, or communication, carried out between a buyer and a seller
to exchange an asset for payment.
b. Provisioning - involves the transfer of money from one account to another, and involves a
third party.
References
 Thuesen, G. J. (1999). Engineering Economy: A Historical Perspective. Retrieved from
(https://peer.asee.org/engineering-economy-a-historical-perspective.pd)
 Mohammed Alanbar (2015). Engineering Economics. Retrieved from
(https://prezi.com/ho4fqp5md7zl/engineering-economics/).
 Dharmaraj, E. (2009) Engineering Economics. Mumbai, IN: Himalaya Publishing House.
 Sebghatullah Karimi (2013). Introduction to Engineering Economy. Kabul Polytechnic. Retrieved
from (https://www.slideshare.net/SebghatullahKarimi/introduction-to-engineering-economy).
 Spacey, J. (2017). 7 Examples of Intangible Value. Simplicable. Retrieved from
(https://simplicable.com/new/intangible-value).