ACTIVITY 1 (ENGINEERING ECONOMICS)
QUESTION 1
Engineers are called upon to analyze and select the most economical alternative among several design
alternatives. Engineers often play a major role in investment decisions based on the analysis and design
of new products or processes. Decisions made by the engineer during the engineering phase of a
product’s development determine the majority of the costs of manufacturing the product.
QUESTION 2
PRINCIPLE
Principle 1 DEVELOP THE ALTERNATIVES
PRINCIPLE 2 FOCUS ON THE DIFFERENCES
PRINCIPLE 3 USE A CONSISTENT VIEWPOINT
PRINCIPLE 4 USE A COMMON UNIT OF MEASURE
PRINCIPLE 5 CONSIDER ALL RELEVANT CRITERIA
PRINCIPLE 6 MAKE RISK AND UNCERTAINTY
EXPLICIT
PRINCIPLE 7 REVISIT YOUR DECISIONS
EXPLAINATION
Carefully define the problem! Then the choice
(decision) is among alternatives. The alternatives
need to be identified and then defined for
subsequent analysis.
Only the differences in expected future outcomes
among the alternatives are relevant to their
comparison and should be considered in the
decision.
The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint
(perspective).
Using a common unit of measurement to
enumerate as many of the prospective outcomes
as possible will simplify the analysis of the
alternatives.
Selection of a preferred alternative (decision
making) requires the use of a criterion (or several
criteria). The decision process should consider
both the outcomes enumerated in the monetary
unit and those expressed in some other unit of
measurement or made explicit in a descriptive
manner.
Risk and uncertainty are inherent in estimating
the future outcomes of the alternatives and
should be recognized in their analysis and
comparison.
Improved decision-making results from an
adaptive process; to the extent practicable, the
initial projected outcomes of the selected
alternative should be subsequently compared
with actual results achieved.
QUESTION 3

Engineering economics involves the systematic evaluation of the economic benefits of proposed
solutions to engineering problems. The engineering economics involves technical analyzing with
emphasis on the economic aspects and has the objective of assisting decisions. Engineering economics is
closely aligned with Conventional Micro-Economics. It is devoted to problem solving and decision
making at the operational level. Thus “Engineering Economics refers to those aspects of economics and
its tools of analysis most relevant to the Engineer’s decision making process”.

The Procedure Used to Assist Decision-Making: The seven-step procedures used to assist the decision
making are:

1. The recognition, definition and evaluation of the problem.

2. Search for potential as well as feasible alternatives.

3. Incorporating the basic cash flow approach.

4. Decision should serve the long term interest of the organization.

5. Analyzing the economic aspects of the engineering problem.

6. The preferred alternative is based on the total effort.

7. Attention to ensure feedback for improvement of operation.

QUESTION 4

FIXED COSTS

 Rental lease payments

 Salaries
 Insurance
 property taxes
 interest expenses

VARIABLE COSTS

 Sales commission
 Direct labor costs
 Cost of raw materials used in production
 Utility costs

INCREMENTAL COST

 10,000 units has a total cost of $300,000 or $30 per unit ($300,000 / $10,000)

 12,000 units has a total cost of $330,000 or $27.50 per unit ($330,000 / $12,000)

 The incremental cost per unit equals $15 ($30,000 / 2,000 units).

 As a result, the total incremental cost to produce the additional 2,000 units is $30,000 or
($330,000 - $300,000). 
QUESTION 5

DIRECT COST

 Direct labor
 Direct materials
 Commissions
 Piece rate wages
 Manufacturing supplies

STANDARD COST (Standard Cost = Direct Material + Direct Labor + Overhead Cost)

 For example, if the direct materials price is $10 and the standard quantity is 20 pounds per unit,
you would multiply $10 by 20 to get $200. This would be the standard cost for the direct
materials only. Let's say the direct labor rate is $15 and the direct labor standard hours per unit
is 10 hours. This would mean the standard cost for direct labor is $150. Now, let's say the
overhead is $10 and the number of hours is 5. This would mean the standard cost for the
overhead is $50 because $10 multiplied by 5 is $50.
 There is a company manufacturing watches. At the beginning of the year, the company
calculated the cost of the production of the watches by considering the past trends and the
expected future conditions of the market. In the coming year the company will likely produce
5,000 units of watches. Also, it is expected that the standard direct material cost per unit will be
$100, the standard labor cost per hour will be $ 20, the standard variable overhead cost is $15
per hour, and the standard fixed cost is $100,000. The total hours that would be required for
producing one unit are 10 hours. Find the standard cost of the company.
 Company a produces product X. The manager has conduct meeting with the engineering, design,
and purchase department, after the meeting they conclude the cost as following: Direct Material
$ 5 per unit, Direct Labor, 4 hours per unit, Overhead $ 3 per unit.

OVERHEAD COST

 Rent.
 Utilities.
 Insurance.
 Office supplies.
 Travel.