Engineering Economy Chapter 2 1|Page

Examples

Example 1

A company AYZ has an estimated sales volume of 200 unit with unit sales price of $25. Compute the:

1- Total cost?
2- Total revenue?
3- Total Profit?

Items Fixed cost Variable cost

Direct material cost - 900$

Direct labor cost - 1,000$

Overheads 2,000$ 900$

Solution

Given: D = 200 P = 25 CF = 2,000 CV = 2,800

1- CT = CF + CV
= 2,000 + (900 + 1,000 + 900) = $4,800

2- TR = P × D
= 25 × 200 = $5,000

3- Profit = TR – CT
= 5,000 – 4,800 = $200

Engineering Economy Chapter 2 2|Page

Example 2

A company manufacture microprocessor for computers whose cost function is given by C = 6Y+9
Where Y is the number of microprocessors. The selling price per unit is P = 30 – 3Y and maximum
output of the plant is 5000 units per month.

1- Determine the optimum demand for this product?

2- What is the maximum profit per month?
3- What is company’s range of profitable demand?

Solution
Given: C= 6Y + 9 P= 30-3Y Y = 5,000 Y is the Demand

1- To get the optimum demand we have to differentiate Profit function due to Y.

TR = P * Y = (30 – 3Y) Y = 30Y – 3Y2
CT = 6Y + 9
Profit = TR – CT = -3Y2 + 24Y + 9

𝑑 𝑃𝑟𝑜𝑓𝑖𝑡
=0
𝑑𝑌
24 – 6Y = 0
Y = 4 units

2- Substitute Y=4 in Profit equation.

Profit = -3 (4)2 + 24 (4) + 9 = $39

−(𝑎−𝐶𝑣)∓ √(𝑎−𝐶𝑣)2−4 (𝑏) (𝐶𝐹)

3- D’ =
−2𝑏
−24 + 21.63
D’1 = = 0.395
−6
−24 − 21.63
D’2 = = 7.605
−6

The range is from 0.395 to 7.605

Engineering Economy Chapter 2 3|Page

Example 3

Diary Company had studied include the relationship between the price and demand and it found the
relationship between them, as shown in the Figure below, Calculate the:

1- The slope and intercepts a and b?

2- Find the price when the company must be sells 1.5 million of product?

Solution
Given: D= 1.8, 1.5, 1.2, 1 Million P = 0.5, 0.9, unknown, 1.10 $

1- Two unknown a and b so we have to make two equations.

1.10 = a – 1 b
0.9 = a – 1.8 b
a = 1.35 and b = 0.25

2- Substitute D=1.5 in Price equation.

P=a–bD
= 1.35 – 0.25 (1.5) = $0.975

Engineering Economy Chapter 2 4|Page

Example 4

Classify the cost situation below to fixed or variable cost:

Raw Materials, Direct Labor, Supplies, Utilities, Property Taxes, Administrative Salaries, Payroll Taxes,
Insurance-Building and Equipment, Clerical Salaries, Sales Commissions, Rent, Interest on Borrowed
Money.

Fixed Cost Variable Cost

Raw Materials X

Direct Labor X

Supplies X

Utilities X X

Property Taxes X

Administrative Salaries X

Payroll Taxes X X

Insurance-Building and
X
Equipment
Clerical Salaries X

Sales Commissions X

Rent X

Interest on Borrowed Money X

Engineering Economy Chapter 2 5|Page

Example 5

A company produces an electronic timing switch. The fixed cost CF is $73,000 per month. The variable
cost per unit Cv is $83. The selling price per unit P = 180 – 0.02 D.

1- Determine the optimal volume of product?

2- Find the volume at breakeven occurs, what is the range of profitable demand?
Solution

Given: CF = 73,000 Cv = 83 P = 180 – 0.02 D

a = 180 b = 0.02

𝑎−𝐶𝑣 180−83
1- D* = = = 2425 unit per month.
2𝑏 2 × 0.02

−(𝑎−𝐶𝑣)∓ √(𝑎−𝐶𝑣)2−4 (𝑏) (𝐶𝐹)

2- D’ =
−2𝑏

−97± √972−4 (0.02)(73000)

D’
2 (0.02)

−97 + 59.74
D’1 = = 932 unit per month.
−0.04

−97− 59.74
D’2 = = 3918 unit per month.
−0.04

The Profitable range is from 932 to 3918 unit per mon

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