UNIVERSITY OF NUEVA CACERES COLLEGE OF ENGINEERING AND ARCHITECTURE

Week 3 & 4: Present Economy

I. Introduction
Present Economy involves the analysis of problems for manufacturing a product or
rendering a service based on present or immediate costs. Present economy studies
usually occur when the effects of time such as interest and depreciation are negligible.
Present economy analysis is employed when the alternatives to be compared will
provide the same result and the length of time involved in the study is relatively short.

In this week lessons, you will learn different situation wherein the effect of time such as
the time value of money, interest and depreciation are negligible that it need not be
considered in the solution to the problems. There is no specific formula to solve the
problems but your prior knowledge in the mathematics subjects will be used to come
up with the right solution and answer.

II. Objectives
At the end of this module, you should be able to :
1. Solve problems using the principles of Selection of Materials; Selection
Methods; Selection Design; Selection Site Comparison of proficiency of
workers; Economy of tools and equipment maintenance; and Economy on the
utilization of personnel
2. Recommend the most economical option based on the costs involved

III. Present Economy

Present economy studies occur in the following situations:

A. Selection of materials
B. Selection of method to be used
C. Selection of design
D. Selection of site location for a project
E. Comparison pf proficiency among workers
F. Economy of tool and equipment maintenance, and
G. Economy of number of workers

A. SELECTION OF MATERIAL

In manufacturing a product it usually happens that two or more materials are

available and such materials will be equally satisfactory. The problem therefore
reduces to which among the materials will result in the most economical product and
the same time give the best results. In these studies the costs of the materials and
their processing are take into account.

B. SELECTION OF METHOD

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UNIVERSITY OF NUEVA CACERES COLLEGE OF ENGINEERING AND ARCHITECTURE

In digging ditches or irrigation canals, manual labor or a ditch digging machine may
be used and both methods will give satisfactory results. In mechanical operations a
product may be made by two or more methods giving equivalent results. Some
goods may be delivered by various methods such as by using different capacity trucks,
and the results would still be the same regardless of the truck used. These are but
few of the examples that may be cited to show that certain operations are capable of
being accomplished by two or more methods. The present economy study reduces to
determining the most economical among the different methods.

C. SELECTION OF DESIGN

In the design of a machine to produce a certain product, the engineer responsible for
the work will usually make as many designs as possible and from which, by a process
of elimination, he will select the design best suited for the work to be done with
particular care being given to the one which will do the work with the utmost
economy. In the design of packages for goods sold in the market, the manufacturer
will always select that one which he believes had the best appeal to buying public.

D. SITE SELECTION

In the choice of a factory site many factors are to be considered, among which are
the cost of the land, the construction cost at the different possible sites, the
availability of skilled labor, and many other factors. In highway or dam construction,
the location of the borrow pit will affect the cost of the earth to be transported. In
these cases, care must be taken in the economic study to include all pertinent factors
that will affect the work.

E. COMPARISON OF PROFICIENCY OR WORKERS

In industrial operations where the efficiency of workers is a factor affecting costs, it is

usually observed that workers have varying efficiencies. Where the proficiencies of
workers can be translated into monetary values, efficient and diligent workers are
paid higher wages.

F. ECONOMY OF TOOL AND EQUIPMENT MAINTENANCE

In many activities, tools have to be sharpened from time to time, and equipment
have to be kept in optimum operating condition all the time. In certain cases,
experience will indicate the best time to perform certain operations to maintain
equipment at the highest level of efficiency.

G. ECONOMY IN THE UTILIZATION OF PERSONNEL

In many industrial operations it is observed that a certain number of workers

cooperating on a specific phase of the work will lead to the highest productivity. An
increase beyond this number will often cause the taking into effect of the Law of
Diminishing Returns. An excess of workers will result in some being idle at certain
periods while waiting for the work of others to be completed. In such case, economy
dictates that only a sufficient number of workers be assigned to minimize idleness.

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UNIVERSITY OF NUEVA CACERES COLLEGE OF ENGINEERING AND ARCHITECTURE

IV. Sample Problems

EXAMPLE ON SELECTION OF MATERIAL

A machine part to be machined may be made either form an alloy of aluminum or steel.
There is an order for 8,000 units. Steel costs P3.80 per kg., while aluminum costs P8.70
per kg. If steel is used, the steel per unit weighs 110 grams; for aluminum, 30 grams.
When steel is used, 50 units can be produced per hour; for aluminum, 80 units per hour
with the aid of a tool costing P640, which will be useless after the 8,000 units are
finished. The cost of the machine and operator is P10.80 per hour. If all other costs are
identical, determine which material will be more economical.

Solution

Steel Aluminum
i i
Material Cost tiii
뛸വi i뛸d വ tiii
വ뛸hi i뛸Ͳ

i뛸വi i뛸വi
Labor and Machine i
i뛸Ͳ വi
i뛸
di
Tool = -------- വtiii
i뛸iവi
____________ ____________
Cost per piece = 0.634 = 0.476
Cost of 8,000 units = 5,072 = 3,808

Answer: Aluminum is cheaper

EXAMPLE ON SELECTION OF METHOD

The ore of a gold mine in the Mountain province contains, on the average, 0.5 gram of
gold per ton. One method of processing costs P1, 650 per ton and recovers 93% of the
gold, while another method costs only P1, 500 per ton and recovers 81% of the gold. If
gold can be solid at P8, 500 per gram, which method is better and by how much?

Solution

Consider the income and cost per ton of ore.

First Method:
Income – Cost = 0.93(0.5) (8,500) – 1,650
Net Receipt = 2,302.50

Second Method:
Income – Cost = 0.81(0.5) (8,500) – 1,500
Net Receipt = 1,942.50

Answer: The first method of processing is better by 360.00

EXAMPLE ON SELECTION OF DESIGN

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UNIVERSITY OF NUEVA CACERES COLLEGE OF ENGINEERING AND ARCHITECTURE

A company manufactures 1,000,000 units of a product yearly. A new design of the

product will reduce materials cost by 12%, but will increase processing cost by 2%. If
material cost is P1.20 per unit and processing will cost P0.40 per unit, how much can
the company afford to pay for the preparation of the new design and making changes
in equipment?

Solution:

The maximum amount the company should spend should not exceed the savings they
will make on the new design.

Decrease in materials cost – Increase in processing cost

= 1,000,000 (0.12) (1.20) – 1,000,000,000 (0.02) (0.40)

Answer: 136,000 (Net savings on new design)

EXAMPLE ON SITE SELECTION

Complying with all government housing regulations and requirements, the employees’
union pf a certain firm has the option to purchase either of two sites, each having an
area of 18 hectares (180,000 m2) of undeveloped land. The first singly owned, would
cost P20.00/m2, but would need a roadway system, including the access road, 4,000
meters long, at a cost of P110.00 per meter. Additional development expenses would
be P60, 000 to subdivide and grade into 320 house lots, and another P32,000 for a
hollow block fence and security gates.

The second site consists of three lots, separately owned, with a total area of 18
hectares: 7 hectares at P25.00/m2 ; 5 hectares at P21.00/m2; and 6 hectares at
P14.00/m2. The road system for this site would be only 3,200 meters long at P100.00
per meter, but needs two box culverts each costing P25,000. Lot grading would be P35,
000; fencing and security gates P24, 000.

Assuming that all other facilities would cost the same in both sites, which of the two
sites would you recommend based on cost of site development alone?

Solution:

First Site:

Cost of Land = 3,600,000

Road System = 440,000
Subdivision and grading = 60,000
Fence and gates = 32,000
___________
Total Development Cost = 4,132,000

Second Site:
Cost of Land:
70,000 (25.00) = 1,750,000

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UNIVERSITY OF NUEVA CACERES COLLEGE OF ENGINEERING AND ARCHITECTURE

50,000 (21.00) = 1,050,000

60,000 (14.00) = 840,000 = 3,640,000
Road System = 320,000
Box Culverts = 50,000
Lot grading and subdivision = 35,000
Fence and gates = 24,000
____________
Total Development Cost = 4,069,000

Answer: Based on development cost alone, and assuming all data to be accurate, the
second site is cheaper and should be recommended.

EXAMPLES OF WORKER PROFICIENCY

Two workers, A and B, produce the same product on identical machines. A receives
P25.00 per hour and he produces 100 units per hour. B is able to produce 120 units per
hour. The machine rate or cost of operation of the machines used by them is P100.00
per hour.

(a) Determine the cost per piece for worker A.

(b) Determine the hourly wage of worker B in order that his cost per piece will equal of
A.

Solution:
Ͳ 뛸iiͲ ii뛸ii
(a) Cost per piece for worker A = ii
뛸h
Answer: 1.25

(b) Let w = wage of worker B per hour so that his cost per piece is
equal to that of A.
Ͳ ii뛸ii
Then Ͳi
뛸Ͳ
Answer: W = 50.00

Note that a 20% increase (20 units) in production per hour entitles worker B
i뛸iiͲͲ 뛸ii
to an increase in hourly wage equivalent to Ͳ 뛸ii
ii ii

EXAMPLES OF EQUIPMENT MAINTENANCE

A machine used for cutting materials in a factory has the following outputs per hour at
various speeds and requires periodic tool regrinding at the intervals cited:

SPEED OUTPUT PER HOUR TOOL REGRINDING

A 200 pieces every 8 hours
B 250 pieces every 7 hours
C 280 pieces every 5 hours

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A set of tools costs P1,800 and can be grounded twenty times. Each regrinding costs
P18.00 and the time needed to regrind and change tools is 1 hour. The machine
operator is paid P28.00 per hour, including the time the tool is changed. The tool
grinder who also sets the tools to the machine is paid P25.00 per hour. The hourly
rate chargeable against the machine is P54.00, regardless of machine speed. Which is
the most economical?

Solution:

Speed A: 200 pieces per hour

Pieces produced in 8 hours = 8 (200) = 1,600 pieces

Cost of Production:
tവii
Tool Cost = Ͳi
= 90.00
Regrinding cost = 18.00
Wage of machine operator = (8+1) (28.00) = 252.00
Wage of tool grinder = 1(25.00) = 25.00
Machine Cost = 8(54.00) = 432.00
________
Total Cost = 817.00
䁝뛸
Cost per piece = t 
뛸 

Speed B: 250 pieces per hour

Pieces produced in 7 hours = 7 (250) = 1,750 pieces

Cost of Production:
tവii
Tool Cost = Ͳi
= 90.00
Regrinding cost = 18.00
Wage of machine operator = (7+1) (28.00) = 224.00
Wage of tool grinder = 1(25.00) = 25.00
Machine Cost = 7(54.00) = 378.00
_________
Total Cost = 735.00
䁝ͺ 뛸
Cost per piece = t䁝 
뛸ch

Speed C: 280 pieces per hour

Pieces produced in 5 hours = 5(280) = 1,400 pieces

Cost of Production:
tവii
Tool Cost = Ͳi
= 90.00
Regrinding cost = 18.00
Wage of machine operator = (5+1) (28.00) = 168.00
Wage of tool grinder = 1(25.00) = 25.00
Machine Cost = 5(54.00) = 270.00
_________

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Total Cost = 571.00

䁝 뛸
Cost per piece = tc
뛸c䁝䁛

Answer: The foregoing comparative analysis indicates that Speed C is the most
economical.

EXAMPLES ON UTILIZATION OF PERSONNEL

A man decided to paint his house himself after office hours. He can paint 25m2 per hour
on the average. It takes him 15 minutes to prepare his materials and 20 minutes to
keep the materials after painting. If there are 900m2 to be painted, how many hours
will it take him to paint his house if he devotes 2 ½ hours each day?

Solution:
ii
Number of hours required = Ͳ
‫ݑ ݋‬
ͲͲi
Net time daily devoted to actual painting = 2.5 – i
뛸 Ͳ ‫ݑ ݋‬

Number of days = 뛸 Ͳ
വ뛸വt th 䁛

Answer: 19 days

V. SUMMARY

Present economy studies occur in the following situations:

A. Selection of materials - is used when a projects require 2 or more materials and
choose the most economical materials

B. Selection of method to be used - is used when a production of product would

require 2 more methods and choose the most economical method

C. Selection of design - is used when production of product can be made using 2 or

more design and choose the most economical design

D. Selection of site location for a project - is used when a project can be installed/built
in 2 or more possible location and choose the most economical site

E. Comparison pf proficiency among workers - is used when 2 workers can produce

the same output using the machine and choose the worker with less salary
expense

F. Economy of tool and equipment maintenance, and

G. Economy of number of workers - is used when the project would require additional
worker to complete the project on time.

ENGINEERING ECONOMICS V.1.0 BY: SABAUPAN 7