SEEM2440: Engineering Economics

Exercise 1

1. A company produces circuit boards used to update outdated computer equipment. The fixed cost
is $42,000 per month, and the variable cost is $53 per circuit board. The selling price per unit is
p = 150 ≠ 0.02D. Maximum output of the plant (also called capacity) is 4,000 units per month.

a) Determine the optimal output level that maximizes profit?

b) What is the maximum profit per month?
c) What is the breakeven point?
d) What is the company’s range of profitable output?

2. Derive the profit function fi(D) and find the quantity of the output that maximizes the profit for each
of the following cases:

a) p = 101 ≠ 2D and T C = 10 + D for 0 Æ D Æ 40

b) p = (D ≠ 10)2 and T C = 10 + 7D for 0 Æ D Æ 10
c) p = 100e≠D and T C = 1 + 50e≠D ◊ D for D Ø 0
Ô
d) p = 5 ≠ D and T C = 1 + 92 log D for 1 Æ D Æ 25

e) p = 5 + (D/40)≠3/2 and T C = 10 + D/40 for 1 Æ D Æ 40

3. Find the range of profitable output for case a) and b) in Problem 2 when the output is not divisible.

4. The cost of operating a large ship (CO ) varies as the square of its velocity (v); specifically, CO = knv 2 ,
where n is the trip length in miles and k is a constant of proportionality. It is known that at 12
miles/hour the average cost of operation is $100 per mile. The owner of the ship wants to minimize
the cost of operation, but it must be balanced against the cost of perishable cargo (CC ), which the
customer has set at $1500 per hour.

• What is k?
• What is the total cost?
• At what velocity should the trip be planned to minimize the total cost (CT ) for traveling n miles?

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5. Ocean water contains 0.8 ounce of gold per ton. The following two methods require the same in-
vestment and are capable of producing the same amount of gold every day. The extracted gold can
be sold for $380 per ounce. Assume that the supply of ocean water is unlimited. Which method of
extraction should be used?

• Method A costs $210 per ton of water processed and will recover 80% of the metal.
• Method B costs $150 per ton of water processed and will recover 60% of the metal.

6. Machine A and Machine B are being considered for the production of a part of a product. The impor-
tant differences between the machines are:

Machine A Machine B
Production rate 100 parts/hr 130 parts/hr
Hours available for production 7 hrs/day 6 hrs/day
Rejection rate 3% 10 %

The material cost is $6.00 per part, the operator cost is $15.00 per hour, and the variable overhead
cost is $5.00 per hour. All defect-free parts produced can be sold for $12 each, and the rejected parts
have no value.

• Assume that the daily demand for this part is large enough that all defect-free parts can be sold.
Which machine should be selected?
• What should the rejection rate be for Machine B to be as profitable as Machine A?