7/18/2019
Fixed and Variable Costs
In connection with surfacing a new highway, a contractor  %ner&# !avin&s throu&h Increased Insulation
has a choice of two sites on which to set up the asphalt-
mixing plant equipment. The contractor estimates that it will
cost $1.15 per cubic yard mile yd!-mile" to haul the asphalt-
 pa#ing material from the mixing plant to the ob location.
%actors relating to the two mixing sites are as follows
&roduction costs at each sites are the same"'
(ost factor )ite * )ite +
*#erage hauling  miles .! miles
distance
onthly rental of site $1,/// $5,///
(ot set up and
$15,/// $05,///
remo#e equipment
auling expense $1.152yd!-mile $1.152yd!-mile
%lagperson 3ot required $42day
The ob requires 5/,/// cubic yards of mixed-
asphalt-pa#ing material. It is estimated that four months 1
wee6s of fi#e wor6ing days per wee6" will be required for  siAe of a house is 1// x 1/  +TE. That is, with no insulation
the ob. (ompare the two sites in terms of their fixed,
#ariable and total costs. *ssume that the cost of the return
trip is negotiable. 7hich is the better site8 %or the selected
site, how many cubic yards of pa#ing material does the
contractor ha#e to deli#er before starting to ma6e a profit if  each year will be reduced. The #alue of energy sa#ings that
 paid $9./5 per cubic yard deli#ered to the ob location8
Optimal Demand When Demand Is a Function of Price
* company produces an electronic timing switch that is used
in consumer and commercial products. The fixed cost  C  F " is
$!,/// per month, and the #ariable cost (cv" is $9! per unit.
The selling price per unit is  p : $19/ ; /./0 D", based on
equation. %or this situation, a" determine the optimal
#olume for this product and confirm that a profit occurs
instead of a loss" at this demand< b" find the #olumes at
which brea6e#en occurs< that is, what is the range of 
 profitable demand8
Breakeven Point When Price Is Independent of Demand
*n engineering consulting firm measures its output in a
standard ser#ice hour unit, which is a function of the
 personnel grades le#els in the professional staff. The
#ariable cost cv" is $0 per standard ser#ice hour. The
charge-out rate =i.e., selling price  p"> is $95.5 per hour.
The maximum output of the firm is 1/,/// per year, and its
fixed cost C  F " is $0,/0,/// per year. %or this firm, a" what
is the brea6e#en point in standard ser#ice hours and in
 percentage of total capacity8 b" 7hat is the percentage
reduction in the brea6e#en point sensiti#ity" if fixed costs
are reduced 1/?< if #ariable cost per hour is reduced 1/?<
and if the selling price per unit is increased by 1/?8
Ho Fast !hould the "irplane Fl#$
The cost of operating a et-powered commercial passenger-
carrying" airplane #aries as the three-hal#es power of its
#elocity< specifically, ( @ : knv!20, when n is the trip length in
miles, k is a constant of proportionality, and v is #elocity in
miles per hour. It is 6nown that at // miles per hour, the
average  cost of operation is $!// per mile. The company
that owns the aircraft wants to minimiAe the cost of   being produced in Lepartment  A. The daily production of
operation, but that cost must be balanced against that cost of  &roduct X   is 5 pieces. The cost accounting records show
 passengersB time ( (", which has been set at $!//,/// per  the following a#erage daily production costs for &roduct M'
hour. a" *t what #elocity should the trip be planned to
minimiAe the total cost, which is the sum of the cost of 
operating the airplane and the cost of passengersB time8 b"
ow do you 6now that your answer for the problem in &art
* minimiAes the total cost8
http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer
Chapter 2 Engg Eco Reviewer
This example deals with a discrete optimiAation problem of 
determining the most economical amount of attic insulation
for a large single-story home in Cirginia. In general, the heat
lost through the roof of a single-story home is
In southwest Cirginia, the number of heating days
 per year is approximately 0!/, and the annual heating
degree-days equals 0!/ 5D%-D%" : !/ degree-days per 
year. ere, 5D% is assumed to be the a#erage inside
temperature and D% is the a#erage outside temperature
each day.
(onsider a 0,//-ft0  single-story house in
+lac6sburg. They typical annual space-heating load for this
in the attic, we lose about 1// x 1/  +TF per year.G
(ommon sense dictates that the Hno insulation alternati#e is
not attracti#e and is to be a#oided.
7ith insulation in the attic, the amount of heat lost
results from adding insulation and reducing heat loss is
dependent on what type of residential heating furnace is
installed. %or this example, we assume that an electrical
resistance furnace is installed by the builder, and its
efficiency is near 1//?.
 3ow weBre in a position to answer the following
question' 7hat amount of insulation is most economical8
*n additional piece of data we need to in#ol#es the cost of 
electricity, which is $/.// per 67h. This can be con#erted
to dollars per 1/J +TE as follows 167h : !,1! +tu"'
The cost of se#eral insulation alternati#es and
associated space-heating loads for this house are gi#en in the
following table
*mount of Insulation
K11 K14 K!/ K!9
In#estmen
// 4// 1!// 1//
t cost $"
*nnual
heating
x1/ 4.9x1/ .0x1/ .0x1/
load
+tu2year"
In #iew of these data, which amount of attic
insulation is most economical8 The life of the insulation is
estimated to be 05 years.
'o Produce or (ot to Produce$
* manufacturing plant consists of three departments' *, +,
and (. Lepartment  A  occupies 1// square meters in one
corner of the plant. &roduct  X   is one of the se#eral products
 
1/8
 7/18/2019 Chapter 2 Engg Eco Reviewer

The department foreman has recently learned about an

outside company sells M at $/.!5 per piece. *ccordingly, the
foreman figured a cost per day of $/.!55" : $0/1./,
resulting
Therefore,ina aproposal
daily sa#ings of $099./-$0/1./:$9.9/.
was submitted to the plant manager 
for shutting down the production line of &roduct M and
 buying it from the outside company.
owe#er, after examining each component
separately, the plant manager decided not to accept the
foremanBs proposal based on the unit cost of product M'
1. Lirect labor' because the foreman was super#ising
the manufacture of the other products in
Lepartment * in addition to &roduct M, the only
 possible sa#ings in labor wound occur if the
operator wor6ing  hours per days on &roduct M
were not reassigned after this line is shut down.
That is, a maximum sa#ings of $4/.// per day
would result.
0. aterials' The maximum sa#ings on direct material
will be $9./. owe#er, this figure could be lower 
if some of the material for &roduct M is obtained
from scrap of another product.
!. @#erhead' +ecause other products are made in
Lepartment *, no reduction in total floor space
requirements will probably occur. Therefore, no
reduction in o#erhead costs will result from
discontinuing &roduct M. It has been estimated that
there will be daily sa#ings in the #ariable o#erhead
costs traceable to &roduct M of about $!.// due to a
reduction in power costs and in insurance
 premiums.

P)OB*%+!

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 2/8
7/18/2019 Chapter 2 Engg Eco Reviewer

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 3/8
7/18/2019 Chapter 2 Engg Eco Reviewer

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 4/8
7/18/2019 Chapter 2 Engg Eco Reviewer

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 5/8
7/18/2019 Chapter 2 Engg Eco Reviewer

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 6/8
7/18/2019 Chapter 2 Engg Eco Reviewer

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 7/8
7/18/2019 Chapter 2 Engg Eco Reviewer

http://slidepdf.com/reader/full/chapter-2-engg-eco-reviewer 8/8