Modul 2 : Engineering Cost and Cost Estimating

Engineering Economy BE Class 2020

Dr. Ir. Musthofa Lutfi, MP.,IPM.

1. Given below is a numbered list of cost terms. For each of the definition
statements that follow, place the number of the cost term in the blank that makes
the statement a correct definition. Each cost term is used only once.
Numbered List of Cost Terms:
1. Recurring 5. Opportunity
2. Variable 6. Incremental
3. Fixed 7. Direct
4. Sunk 8. Nonrecurring

a. _____ costs are those that have occurred in the past and have no relevance
to estimates of future costs and revenues.
b. _____ costs are incurred because of the use of limited resources such that
the ability to use those resources to monetary advantage in another way is
foregone.
c. _____ costs are those which are unaffected by changes in activity level over
a feasible range of operations for the capacity available.
d. _____ costs, in total, change in relation to the quantity of output or other
measures of activity level.
e. _____ cost refers to the additional cost that will result from increasing the
output of a system by one or more units.
f. _____ costs are those that are repetitive and occur when goods or services
are produced on a continuing basis.
g. _____ costs can be reasonably measured and allocated to a specific output
or work activity.
h. _____ costs are not repetitive even though the total expenditure may be
cumulative over a relatively short period of time.
2. A group of enterprising engineering students has developed a process for
extracting combustible methane gas from cow manure (don’t worry, the exhaust is
odorless). With a specially adapted internal combustion engine, the students claim
that an automobile can be propelled 15 miles per day from the “cow gas”
produced by a single cow. Their experimental car can travel 60 miles per day for
an estimated cost of $10 (this is the allocated cost of the methane process
equipment—the cow manure is essentially free).
a. How many cows would it take to fuel 1,000,000 miles of annual driving by a
fleet of cars? What is the annual cost?
b. How does your answer to Part (a) compare to a gasoline-fueled car averaging
30 miles per gallon when the cost of gasoline is $4.00 per gallon?
3. Web Exercise Home heating accounts for approximately one-third of energy
consumption in a typical U.S. household. Despite soaring prices of oil, coal, and
natural gas, one can make his/her winter heating bill noninflationary by installing
an ultraconvenient corn burning stove that costs in the neighborhood of $2,400.
 That’s right—a small radiant-heating stove that burns corn and adds practically
nothing to global warming or air pollution can be obtained through
www.magnumfireplace.com. Its estimated annual savings per household in fuel is
$300 in a regular U.S. farming community. Conduct research on this means of
home heating by accessing the above Web site. Do the annual savings you
determine in your locale for a 2,000-square foot ranch-style house more than
offset the cost of installing and maintaining a corn-burning stove? What other
factors besides dollars might influence your decision to use corn for your home
heating requirements? Be specific with your suggestions.

4. An electric power distributor charges residential customers $ 0.10 per kilowatt-

hour (kWh). The company advertises that “green power” is available in 150 kWh
blocks for an additional $4 per month. (Green power is generated from solar,
wind power, and methane sources.) (3.3) a. If a certain customer uses an average
of 400 kWh per month and commits to one monthly 150 kWh block of green
power, what is her annual power bill? b. What is the average cost per kWh with
green power during the year? c. Why does green power cost more than
conventional power?