ENEECO30 -Engineering Economy

PROBLEM SET # 2

COST CONCEPT AND DESIGN PROCESS

PROBLEM #1: COST, VOLUME, BREAK-EVEN RELATIONSHIP

To maintain constant pressure on engine valves, and improve efficiency in automotive

engine, lash adjuster is used. Equation below shows the link between the lash adjuster price (p)

and monthly demand (D).

3000 − 𝑝
𝐷=
0.15

To maximize total revenue, what demand should be considered? What important dat

needed if maximum profit is desired?

Given:
𝐷=
.

Solution:
Get number of demands to maximize revenue
 𝐷=
.

 𝑝 = 3000 − 0.15𝐷
Take note that 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (𝑇𝑅) = 𝑝𝐷
 𝑇𝑅 = 𝑝 ∗ 𝐷 = 3000𝐷 − 0.15𝐷

Get the first derivate of TR with respect to D

( ) ( )
 = 3,000 − 0.3𝐷 To get maximum value of D, set =0
 0 = 3,000 − 0.3𝐷
 0.3𝐷 = 3000
 𝐷 = 10,000

Answer:
𝑫 = 𝟏𝟎, 𝟎𝟎𝟎 𝒖𝒏𝒊𝒕𝒔 𝒑𝒆𝒓 𝒎𝒐𝒏𝒕𝒉

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #2: COST, VOLUME, BREAK-EVEN RELATIONSHIP

Engr. Roque owner of the HarRoq’s Ice Plant is monitoring the cashflow of the plant.
Based on the following information, how many ice blocks must produce and able to sell per month
in order to break even?
Ice block price Php 50.00/ice block
Cost of electricity Php 30.00/ice block
Tax to be paid Php 3.00/ice block
Real estate Tax Php 4,500.00/month
Salaries and wages Php 30,000.00/month
Others Php 15,000.00/month
Given:
Ice block price Php 50.00/ice block
Cost of electricity Php 30.00/ice block
Tax to be paid Php 3.00/ice block
Real estate Tax Php 4,500.00/month
Salaries and wages Php 30,000.00/month
Others Php 15,000.00/month
Solution:

Let 𝐷 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑐𝑒 𝑏𝑙𝑜𝑐𝑘 𝑡𝑜 𝑏𝑒 𝑠𝑜𝑙𝑑 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ

 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
 𝐼𝑐𝑒 𝐵𝑙𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑙𝑒𝑐𝑡𝑟𝑖𝑐𝑖𝑡𝑦 + 𝑇𝑎𝑥 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 + 𝑅𝑒𝑎𝑙 𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥 +
𝑆𝑎𝑙𝑎𝑟𝑖𝑒𝑠 𝑎𝑛𝑑 𝑤𝑎𝑔𝑒𝑠 + 𝑂𝑡ℎ𝑒𝑟𝑠
 (Php 50.00)𝐷 = (Php 30.00)𝐷 + (Php 3.00)𝐷 + 𝑃ℎ𝑝 4,500.00 +
𝑃ℎ𝑝 30,000.00 + 𝑃ℎ𝑝 15,000.00
 𝐷 = 2,911.76 𝑖𝑐𝑒 𝑏𝑙𝑜𝑐𝑘𝑠 𝑜𝑟 2,912 𝑖𝑐𝑒 𝑏𝑙𝑜𝑐𝑘𝑠

Answer:
𝑫𝒊𝒄𝒆 = 𝟐, 𝟗𝟏𝟐 𝒊𝒄𝒆 𝒃𝒍𝒐𝒄𝒌𝒔

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #3: COST, VOLUME, BREAK-EVEN RELATIONSHIP

A part is being considered for manufacture on two currently owned machines. The capital

investment in the machines is roughly the same and can be overlooked. The production capabilities

and reject rates of the machines are the most significant distinctions between them. Consider the

table below.

Machine A Machine B

Production hours 7 hours/day 6 hours/day

Rejected parts 5% 12%

Rate of production 100 parts/hour 130 parts/hour

The material cost is Php 300.00 per part, and all defect-free parts can be sold for Php 600.00 each.

For either machine, the operator cost is Php 750.00 per hour and the variable overhead costs is Php

250 per hour.

a. Assume that the daily demand for this part is large enough that all defect-free parts can be

sold. Which machine should be selected?

b. What would the percent of parts rejected have to be for the other machine to be as profitable

as the chosen machine?

Given:
Operating Cost (𝐶 ) = 𝑃ℎ𝑝 250 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟
Material Cost (𝑐 ) = 𝑃ℎ𝑝 300.00 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡
Parts price (𝑝) = 𝑃ℎ𝑝 600.00 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡
Machine A
Production hours (𝑡) = 7 ℎ𝑜𝑢𝑟𝑠/𝑑𝑎𝑦
Rejected parts rate (𝑥) = 5%
Rate of production (𝐷) = 100 parts/hour

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Machine B
Production hours (𝑡) = 6 ℎ𝑜𝑢𝑟𝑠/𝑑𝑎𝑦
Rejected parts rate (𝑥) = 12%
Rate of production (𝐷) = 130 parts/hour
Solution:

A. Assume that the daily demand for this part is large enough that all defect-free parts

can be sold. Which machine should be selected?

𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

Note: Cost should be accumulated daily

For Total Revenue
 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ∗ 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ℎ𝑜𝑢𝑟𝑠 ∗ 𝑃𝑎𝑟𝑡 𝑃𝑟𝑖𝑐𝑒 ∗
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦
 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑝𝐷𝜂
Where 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 (𝜂) = 1.00 − 𝑥

For Total Cost

 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑡𝐶 + 𝑡𝑐 𝐷

Solve for the Total Profit of Machine A

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = (𝑝𝐷𝜂) – (𝑡𝐶 + 𝑡𝑐 𝐷)
 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = (𝑃ℎ𝑝 600.00 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡) 100 7 (1 −

0.05) – 7 (𝑃ℎ𝑝 250 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟) +

7 100 (𝑃ℎ𝑝 300 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡𝑠)

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃ℎ𝑝 187,250.00/𝑑𝑎𝑦

Solve for the Total Profit of Machine B

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = (𝑝𝐷𝜂) – (𝑡𝐶 + 𝑡𝑐 𝐷)

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = (𝑃ℎ𝑝 600.00 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡) 130 6 (1 −

0.12) – 6 (𝑃ℎ𝑝 250 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟) +

6 130 (𝑃ℎ𝑝 300 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡𝑠)

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃ℎ𝑝 176,340.00/𝑑𝑎𝑦

Answer:
𝑴𝒂𝒄𝒉𝒊𝒏𝒆 𝑨 𝒔𝒉𝒐𝒖𝒍𝒅 𝒃𝒆 𝒔𝒆𝒍𝒆𝒄𝒕𝒆𝒅 𝒘𝒊𝒕𝒉 𝒂 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑓𝑃ℎ𝑝 187,250.00/𝑑𝑎𝑦

B. What would the percent of parts rejected have to be for the other machine to be as

profitable as the chosen machine?

Consider the following:

1. Total Profit for Machine B equal to Total Profit of Machine A

(𝑃ℎ𝑝 187,250.00/𝑑𝑎𝑦)

2. Rejection rate is unknown

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 = (𝑝𝐷𝜂) – (𝑡𝐶 + 𝑡𝑐 𝐷)
 𝑃ℎ𝑝 187, 250/𝑑𝑎𝑦 = (𝑃ℎ𝑝 600.00 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡) 130 6 (1 −

𝑥) – 6 (𝑃ℎ𝑝 250 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟) +

6 130 (𝑃ℎ𝑝 300 𝑝𝑒𝑟 𝑝𝑎𝑟𝑡𝑠)

 (𝑥) = 0.09668

Answer:
𝒙 = 9.67%

Instructor: Engr. Michael Benjamin M. Diaz