Economics 7th Sem

ECONOMICS FOR ENGINEERS
SOLUTION 20166
Group-A
(Multiple Choice Type Questions)
1. Choose the correct alternatives for the following:

DWhich one of the following is fixed cost?
a) Deprecíation of fixed assets b) Exciso duty
c) Cost of advertising d) Salos tax
Chapter Name: "ENGINEERING DECISION MAKING"
Answer: ()
WDV stands for

a) Written Drum Value b) White Drum Value
c) Written Down Value d) Written Drawing Value
Chapter Name: "DEPRECIATION METHOD"
Answer: (a)
l) Costs reflected in accounting system only are called

a) Cash cost b) Book cost c) Overhead cost d) Direct cost
Answer: (b)
M What is the relationship between Marginal Cost (MC) and Average Cost (AC)
Curves?
a) AC cuts the MC from below b) MC cuts the AC from below
c) AC and MC do not cut each other d) AC cuts MC at its maximum
Answer: (b)
Salvage value means

) cash to be pald when asset Is disposed off
b) estimated disposal value
C) definite sale prlce of the asset
d) cash to be received when life of tho asset ends
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SOLUTION 2016S
Group-A4
(Multiple Choice Type Questions)
Choose the correct alternatives for the following:

1.
Which one of the following is fixed cost?
a) Depreciation of fixed assets b) Excise duty
c) Cost of advertisingg d) Sales tax

Answer: (c)
i) WDV stands for

a) Written Drum Value b) White Drum Value
c) Written Down Value d) Written Drawing Value
Chapter Name: "DEPRECIATION METHOD"
Answer: (a)
in) Costs reflected in accounting system only are called

a) Cash cost b) Book cost c) Overhead cost d) Direct cost
Answer: (b)
iv) What is the relationship between Marginal Cost (MC) and Average Cost (AC)
curves?
a) AC cuts the MC from below b) MC cuts the AC from below
c) AC and MC do not cut each other d) AC cuts MC at its maximum
Answer: (b)
v) Salvage value means

a) cash to be paid when asset is disposed off
b) estimated disposal value
c) definite sale price of the asset
d) cash to be received when life of the asset ends
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ENGINEERING DECISION MAKING

Multiple Chofce Type Cuestions
1. Gantt chart is used for

WBUT 2015]
a) inventory control
b) material handling
c) production schèdule
d) none of these
Answer: (c)
2. In break-even analysis, the total cost consists of [WBUT 2015]
a) fixed cost+ variable cost
b) fixed cost+ sales revenue
c) fixed cost
d) variable cost
Answer: (a)
3. Sunk cost can be defíned as WBUT 2015
a) original investment depreciation+ repairing expenses
b) original investment+ depreciation - repairing expenses
c) original investment-depreciation- repairing expenses
d) original investment+ depreciation + repairing expenses
Answer: (a)
4. At break-even point
a) total sales = variable cost
lei aniss0 [WBUT 2015]
b) total sales = fixed cost
c) total sales = total cost aiaylenAg
d) fixed cost= variable cost
Answer: (6) iagaugiqs
5. Engineering Economics deals with
the methods that enable one 'to take
economic decisions towards
a) minimizing costs [MODEL QUESTION]N
b) maximizing revenues
c) other related gains of organisation
d) all of the above
Answer: (d)
6. Sunk cost. 93324H02080
for engineering decision-making
a) relevant [MODEL QUESTION]
b) non-relevant
c) Both (a) and (b)
d) None of these
Answer: (b)
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Short AnswerType, Questions

1. PS Associates has the following details:
Fixed cost = Rs. 20,00,000
Variable cost = Rs. 100
Selling price per unit = Rs. 200
Find the (A) the break-even sale quantity
If the actual production quantity is 60,000 find (B) contribution (C)
margin safety.
WBUT 2015]
Answer:
(A) Break-even-quantity=- Fixed cost
Selling price per unit - variable cost per unit
20,00,000 20,00,00020,000
units
200-100 100
(B) Contribution per unit
Sellingprice per unit Variable cost per unit
-
-
200-100 = 100 Rs.

Contribution = Contribution per unit x Actual production quantity
100x 60,000
60,00,000 Rs.
(C) Margin of safety
= Actual
sales quantity-Breák-even sales quantity
(Assuming all production are sold)
=
60,000-20,000 40,000 units
2. What do you.mean by engineering decision making process? Discuss with
suitable examples. WBUT 2015]
Answer:
Engineering decision making involves the systematic evolution of the economic merits
of proposed solutions to engineering problems. To be economically acceptable (i.e.
affordable), solutions to. engineering problems must demonstrate a positive balance of
long-term benefits over long-term costs and they must as so -
an organization
a. promote the well being and survival of
b. embody creative and innovative technology and ideas
c. permit identification and scrutiny of their estimated outcomes
d. translate profitability to the 'bottom line' through a valid and acceptable measure
of merit.
The principles of Engineering Economy are as follows
Principle - 1: Develop the alternatives:
to be identified and then
The choice (decision among alternatives, the alternatives need
defined for subsequent analysis).
Principle-2: Focus on Differences: among the alternatives are relevant to their
Only differences in expected future outcomes
decision.
comparison and should be considered in the
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Use consistent Viewpoint: and other should be consistentlv

Principle-3: a alternatives, economic
prospective outcomes of the
he (perspective).
developed from a defined view point measure: outcomes
Principle- 4: Use a common unit of to enumerate as many of the prospective
measurement
USing a common unit of
analysis of the alternatives.
as possible will simplify the
Criteria: a criterion or
Principle-5: Consider All Relevant (decision making) requires the use of
alternative
both the outcomes enumerated
in
Selection of a preferred should consider
several criteria). The decision process some other unit of
measurement or made
those expressed in
the monetary unit and
explicit in a descriptive manner.
Explicit:
Principle-6: Make risk and Uncertainty estimating the future outcomes of the alternatives
in
Risk and uncertainty are inherent
and comparison.
and should be recognized in their analysis
Principle-7: Revisit Your Decisions: adaptive process, to the extent practicable, the
Improved decision making results from an
alternatives should be subsequently compared
initial projected outeomes of the selected
with actual results achieved.
3. What are the methods of job evaluation?

Explain the point ranking method of job
WBUT 2015]
evaluation.
Answer:
Techniques of Job Evaluation are as follows:
1. Point Rating Method
2. Factor comparison method
3. Decisicn Band Method
4. Ranking Method
Point Rating Method is described as follows:
In this method of job evaluation, classification and grading of jobs is done, based on their
significance and importance to the organization. Grades are formulated on the basis of the
nature of tasks and responsibilities of the jobs, the authority associated with them, and the
knowledge and skills required for the jobs.
4. Discuss the basic principles of Engineering Economics. [MODEL QUESTION

Answer:
The principles ofEngineering Economy are as follows
Principle-1: Develop the alternatives:
The choice (decision among altenatives, the altematives need
to be identified and then
defined for subsequent analysis).
Principle-2: Focus on Differences:

Only differences in expected future outcomes among
the alternatives are relevant to their
comparison and should be considered in the decision. tne
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ECONOMICS FOR ENGINEERRS
Principle -3: Use a consistent Viewpoint:

The prospective outcomes of the alternatives, economic and other should be consistently
developed from a defined view point (perspective).
Principle-4: Use a common unit of measure:

Using a common unit of measurement to enumerate as many of the prospective
outcomes
as possible will simplify the analysis of the alternatives.
Principle - 5: Consider All Relevant Criteria:

a criterion or
Selection of a preferred alternative (decision making) requires the use of
outcomes enumerated in
several criteria). The decision process should consider both the
the monetary unit and those expressed in some other
unit of measurement or made
explicit in a descriptive manner.
Principle -6: Make risk and Uncertainty Explicit:

future outcomes of the alternatives
Risk and uncertainty are inherent in estimating the
and should be recognized in their analysis and comparison.
Principle-7: Revisit Your Decisions: to the extent practicable, the

Improved decision making results from an adaptive process,
should be subsequently compared
initial projected outcomes of the selected alternatives
with actual results achieved.
[MODEL QUESTION]
5. Discuss the criteria for make of buy decision.
Answer:
Criteria for make
The following are the criteria for make:
1. The finished product can be made cheaper
by the firm than by outside suppliers.
2. The finished product is being
manufactured only by a limited number of outside
firms which are unable to meet the demand.
3. The part has an importance for the firm
and requires extremely close quality control.
4. The part can be manufactured with
the firm's existing facilities and similar to other
experience.
items in which the company has manufacturing
Criteria for buy
The following are the criteria for buy:
1. Requires high investments on facilities
which are already available at suppliers plant.
2. The company does not have
facilities to make it and there are more profitable
opportunities for investing company's capital.
3. Existing facilities of the
company can be used more economically to make other
parts
by the company is not readily adaptable to make the
4. The skill of,personnel employed
part.
prevent the company for making the part
5. Patent or other legal barriers
temporary or seasonal.
6. Demand for the part is either
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Long Answer Type Ouestlons
1. a) What are the major objectives of plant layout?

b) What are the types of plant layout? Explain.
c) What are the principles of good plant layout?
d) When to use product and process layouts? WBUT 2016]
Answer:
layout.
a) The physical disposition of the facilities of a plant is reserred to as the plant
The objectives of a good plant layout are that to have long-term consequences in terms of
cost and the company's ability to serve its customers.
process layout and fixed layout. In
b) The three types of layouts are product layout,
product layout, machinery and equipment are arranged according to the products. This
layout is also referred to as an assembly line or product line. According to this layout,.
each product is manufactured separately and there will be no interferences in the
production lines of these three products. In process layout, all similar equipments or
functions are grouped together like all lathes in one area, and all drilling machines in
anotherarea. For example if a company uses grinding, drilling, painting, milling, sanding,
assembly to produce Product P. All grinding machines are grouped at one place, all
sanding machines are grouped at another place. A fixed layout is used when the product
is bulky, large, heavy, and remains stationary. For ex: All manufacturing
and construction
firms select a fxed position for construction and all materials, machines,
sub contractors
and workers are taken to the fixed place. Examples
of fixed layouts are ship buildings,
aircraft assembling, satellite assembling etc.
c)A good plant layout can be based on maximum flexibility, maximum coordination,
visibility, andeasy accessibility with minimum
distance, efficient handling, and 1o
remove discomfort in various activities. It
can also ensure inherent safety, efficient
process flow and identification.
d) Product layout is used under following circumstances

-To Produce small number of products efficiently
- When Resources are specialized
- When capital intensity is high
- When situation demands

Low flexibility relative
to the market.
Process layout is used under following circumstances
When resources are of General purpose & flexible
- When Facilities are more labor intensive
- When there is Lower capital intensity &

automation
When there is higher labor intensity.
the varlous costs assoclatod wlth Invontory,
2. a) Explaln
b) Explaln the concopt of tho "Q' system and p' systom,
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c) A company usos 75 Nos. of items per month. Each Ttum costs Rs.25/-. Cost of
putting through each order and inventory carrying cost per month are stipulated as
Rs. 36/ and 1.5% of the average inventory investment respectively. What is
economic ordor quantity? [WBUT 2015]
Answer:
a) Different Types of Inventory Costs are as follows:
Purchase costs: The purchase cost of an item is 'nx' where 'x' is the unit price
of the items and 'n' is the number of items that the firm wants to purchase.
Carrying costs: Carrying costs are incurred on inventories stored in warehouses
or stores. Carrying costs include opportunity costs, storage costs, cquipment
maintenance costs, insurance costs, and interest charges for financing the
inventorics.
Ordcring costs: Ordering costs are those costs incurred each time an order is
placed with. the supplier. These costs are considered fixed and so unit.cost
decrease with increase in order size.
Stock-out costs: Stock out costs or shortage costs are penalty costs associated
with delays in meeting demand or stoppage in production due to shortage of
stock.
b) Fixed order quantity system (Q): In this system, the inventory is continuously
checked and a new order is placed when the inventory level reaches a certain point called
the reorder point.
The order quantity (Q) is always constant and is determined by demand and cost
factors.
As time passes, the stock level gradually depletes and reaches the reorder point
R. The stock is replenished by ordring Q units at that point.
The reorder point is determined by estimating the expected usage of inventory
during the lead time plus the safety stock required.
Fixed ordcr period system (P SYSTEM): In this system, the order period is fixed, but
the order quantity differs with the requirement.
The order quantity depends on the current inventory level and the future
inventory requirements.
The inventory level is measured during the review period and the order size is
estimated based on the available and required inventory level.
c) Annual demand = 75 x 12= 900 units

Purchase price per unit =P=25 Rs.
Ordering cost = Co= 36 Rs.
Carrying
Carrying cost peruunit per year= 25x1.5%x12=4.50 Rs.
cost per
Economic Order Quantity

= DC 2x900x30
2x900x 30120 units.
120
C 4.50
3. Write short note on

a) Life cycle costing TWBUT 2015]
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financial practices to
Answer: managerial, engineering and
LiTe cycle costing applies mixture of assets. Its objective
life cycle cost of the physical
pnysical assets to achieve the economic way so that it resuis in
lowest cost during
efficient a trade of
s use the physical assets in such an cycle costing seeks to achieve
Therefore, life
tne lite span of the assets. cost.
capital cost and lower running and maintenance maintenance cost by
oetween higher used to reduce the
philosophy is
in life cycle costing, just-in-time to avail the necessary
spares as and when
JIT basis
applying the inventory control on a in the same quantity as wanted which leads
exactly
maintenance departments wants and maintenance cost.
the need to keep spares inventory which reduces tne
to elimination of to eliminate waste resulting from
philosophy is also applied in life cycle costing
JIl
hence the application of ite
cycle cOsting reduces the
manutacturing process and
cost.
machine down time over its life and its setup
WBUT 2015]
b) Power sizing model of cost estimation.
Answer manufacturing any product will increase in
This model expresses that cost of producing/
is a practically an effect of economy
different proportion as the units are increased. This
known costs, thereby accounting for
of scale. The model "scales up" or "scales down"
and equipment costs. Consider the
economies of scale that are common in industrial plant
build the same facility with double
cost to build a Factory .Would it cost twice as much to uses
the exponent (x), called the
the capacity? It is unlikely. The power-sizing model
capacity.
power-sizing exponent, to reflect economies of scale in the size or
termed as
Cost of economic comparable production cost depends on an exponential factor
comparable item
Power Sizing Exponent. To estimate the cost of B based on the cost of
A, use the equation.
Cost of B/Cost of A = Size (capacity) ofB/Size(capacity) of A
Where x is the power-sizing exponent, costs of A and B are at the same point in time
(same rupee basis), and size or capacity is- in the same physical units for both A and B.
The power-sizing exponent () can be 1.0 (indicating a linear cost-versus-size/capacity
relationship) or greater than 1.0 (indicating diseconomies of scale), but it is usually less
than 1.0 (indicating economies ofscale). Generally the ratio should be less than 2, and it
should never exceed 5. This model works best in a "middle" sized asset not for very small
or very large size.
4. An item has a yearly demand of 2,000 units. The different costs in respect of
make and buy are as follows. Determinethe best option.
Buy Make
Item cost/unit 8.00. 5.00
Procurement cost/order R
120.00
Setup cost/set-up 60.00
Annual carying costitemlyear 1.60 1.00
Production rate/year 8,000units
[MODEL QUESTION]
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ECONOMICSFOR ENGINEERS
Answer:
Buy option
D=2,000 units/year, C, =Rs. 120/order, C =Rs.1.60/unit/year
CD2x2000x120
CTC=DP4DG,9, 1.60
= 548 units (approx.)
2
=2000+8x2000x120 548x1.60
=Rs. 16,876.36
16,876.36
548 2
Make option
r
C, Rs. 60/set-up, =2000 units/year, C. =Re.1/unit/year, k = 8000 units/year
2C 2x60x 2000 = 566units (approx.)

C1-(/E) 1.0(1-2000/8000)
TC=DP+DxCC.(k-r)*
2xk
2000x601.0(8000-20002x8000
566
2000x5.00+-
566
- Rs. 10,424.26
The cost of making is less than the cost of buying. Therefore, the firm should go in for
tho making option.
5. A company has extra capacity that can be used to produce a sophisticated

fixture which it has been buying for Rs. 900 each. If the company makes the
fixtures, it will incur materials cost of Rs. 300 per unit, labor costs of Rs. 250 per
unit, and variable overhead costs of Rs. 100 per unit. The annual fixed cost
assoclated with the unused capacity is Rs. 10,00,000. Demand over the next year is
estimated at 5,000 units. Would it be profitable for the company to make the
fixtures? [MODEL QUESTION]
Answer:
We assume that the unused capacity has alternative use,
Cost to make
Variable cost/unit = Material+ labour + overheads
= Rs. 300 + Rs. 250+ Rs. 100
Rs. 650
=
Total variable cost= (5,000 units) (Rs. 650/unit)
Rs. 32,50,000
Add fixed cost associated with unused capacity +Rs. 10,00,000
Total cost = Rs. 42,50,000
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Cost to buy
Purchase cost = (5,000 units) (Rs. 900/unit)
= Rs. 45,00,000
Add fixed cost associated with unused capacity +Rs. 10,00,000

Total cost = Rs. 55,00,000
The cost of making xtures is less than. the cost of buying fixtures from outside.
Therefore, the organization should make the fixtures.
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DEFINITION AND SCOPE OF ENGINEERING

ECONOMICS
Multiple Choice Type Qucstlong
1. Which of the following is true? WBUT 2014]

a) Margin of safety = Actual Sales - Break Even Sales
b) Margin of safety = Actual Sales + Break Even Sales
c) Margin of Safety = Actual Sales / Break Even Sales
d) Margin of safety = Actual Sales x Break Even Sales
Answer: (a)
2. A demand curve can shift because of changing WBUT 2015]

a) incomes
b) prices of related goods
c) tastess
d) all of these
Answer: (d)
[MODEL QUESTION]
3. Costs reflected in accounting system only are called
a) Cash cost b) Overhead cost
c) Book cost d) Direct cost
Answer: (¢)
[MODEL QUESTION]
4. The opportunity cost of a good is
a) the time last in finding it
b) the quantity of other goods sacrificed to the another unit of that good
c) the expenditure on the good
d) the loss of interest in using saving?
Answer: (6)
5. To compute the construction cost per square foot of a building

MODEL QUESTION]
a) Per unit model will be used
b) Segmenting model will be used
c) Learning curve estimation process will be used
d) None of thesee
Answer: (b)
6. Which one is fixed cost? [MODEL QUESTION]

a) Depreciation of fixed assests
b) Excise duty
c) Cost of advertising
d) Sales tax
Answer: (C)
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SiortAnswer pe Ouestons
1. The following data are obtained from the records of factory:
Sales Rs. 2,00,000
Raw material consumed Rs. 60,000
Labour charges Rs. 40,000
Variable O/H Rs. 20,000
Fixed O/H Rs. 25, 000
WBUT 2014]
Calculate: (a) BEP Sales in terms of Rupee value.
Answer:
Fixed costx Sales
Break-even-point (RS.)=
Sales-Variable cost
Fixed cost xSales
Sales-(Consumed + Labour changes + Variable overhead
25,000x2,00,000
2,00,000-(60,000+ 40,000+20,000)
25,000x2,00,000
62.500 Rs.
80,000
2. What is meant by improvement and learning curve? State its benefits.

WBUT 2014
Answer
The assumption that as a particular task is repcated and the operator systematically
becomes quicker at performing the task. In particular, the model is based on the
assumption that the time required to complete the task for production unit 2x is a fixed
percentage and will be less than the double of the time required for production unit x for
all positive, integer x. e.g, if S hrs is required for producing a single unit and the learning
rate is 80 % then to producing 2 units will be S*2*80% = 8 hrs and producing double the
units i.e., 4 units will be 8 Hrsx 2 x 80 %= 12.8 hrs . Learning curve the plotted curve
is
showing the time required for each doubling of the units produced. As-the time required
is less when units are doubled, the curve would be down ward sloping towards
right. The
learning curve slope indicates "how fast" learming occurs.
Learning curve is applicable to the industries with high labour turnover.
As labour hours
reduces resulting to reduction of labour cost and this learming
curve model would help in
preparing the labour requirement and cost budget. It also helps in
reducing the idle ime
by proper works scheduling considering the learning effect. There
are huge advantages of
this improvement and learning curve.
a) Provides cost reduction opportunities.
b) Evaluate effectiveness of training programmes.
c)Helps in proper work scheduling.
d) Itis important tool in making working capital budget.
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e)Helps in proper staff recruitment programmes.
how preventive
3.State the different components of Life Cycle Cost? State
effective
maintenance will help in reducing downtime of a machine increasing its
[WBUT 2014]
life?
Answer:
In economic engineering analysis the assets are compared
with the lifeof human beings,
ultimately declining termed
like growing through various phases, reaching maturity and
an asset, also commonly
as the life cycle. The total cost of ownership over the life of
cost are associated
referred to as "cradle to grave" or "womb to tomb". At every stages
for maintenance. Similarly every product and
services produced also moves through
phases in life cycle and each phase incurs various costs. It
includes cost associated with
development, production,
acquiring, using, caring, feasibility study, design and
and operation. The below figure
maintenance, replacement and disposal, support, training
depicts the various phases and cost associated.
DIFFERENT LIFE CYCLE STAGES

use.| Decline and End
Need Assessment Product Design | Manufacturing /|Operational/
|
Production/ Maintenance & stage

Research and Stage
sales Service
Development All cost to end the|
Cost associated Initial Final Actual production|All cost incurred to|
constructions operate and project/product
with requirement design| design
cost after design maintain and dispose off.
analysis and
research being sanctioned.
COST ASSOCIATED WITH VARIOUS ACTIVITES
AT EACH STAGE.
the
- Planning cost Prototýpe Resource Use by end user.|- Manage
product for its
Testing allocation Train personnel
Feasibility study anticipated life
Development. |- Procurement Operational
cost Planning for
Detailed and acquiring manual for
Product design phasing out and
stage methods of use
process design and
Maintenance till end.
sanction Building new
and support. Proper disposal
Production support
facilities. Inventory Replacement/
allocations
Assembly line support. Alternative
Production planning.
up. Planning for
planning
Operational support at
planning decline stage.
+ scheduled maintenance
LCC acquisition costs +operating costs conversion/decommission.
+unscheduled maintenance +
4. Discuss the difference between fixed

cost and variable cost. Explain graphically
and marginal cost. WBUT 2014]
the relationship between average cost
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Answer:
Variable Cost
Fixed Cost.
. They are not a function ofoutput. 1. They are function of output in the
production period.
|
2. They do not vary with output upto a 2. They vary directly and sometime
certain level or activity. proportionately with the output.
3. They are incurred in híring the fixed 3. They are incurred in employment of the
factors of production whose amount variable factors of production whose
cannot be adjusted in short time. amount can be altered in the short run.
|4. They cannot be avoided until the 4. They can be avoided if a firm shuts
operations of the firm are completely down in the short run, then it will not incur
closed down, in the event of shut-down variable costs.
of operations they are to be borne.
5. They are also called contractual cost. 5. They are aalso called prime cost or direct
costs.
Let C be the average cost of producing x units of a commodity and Ci be the AC of

producing (x + 1) units. Then the MC =TC of (x+ 1) units-TC of x units = Ci (x + 1)-
Cx=(C-C)x+C
MC-(C-C)x+AC = relation depends on whether (C-C) is +ve, -ve, or zero.
For the above equation it follows:
1. Ifaverage cost is falling, then, MC is below average cost [(C-C) is (-ve)]
2. If AC is constant, then C=C, therefore MC = AC.
3If AC is rising, then (C1-C) is positive, so that MC> AC, i.e., MC is above AC.
So that MC> AC, i.e., MC is above AC. Therefore the relationship
between marginal
cost and average cost' is as follows:
MC
AC
UNITS
Marginal cost-average cost relationship
is one of mathematical
points to note in this regard are: truism and the important
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ECONOMICS FOR ENGINEERS$
1. We cannot generalise the direction in which marginal cost is moving from the way
average cost is changing but what we can definitely say is that
(a) When average cost is falling marginal cost will be below it but it may be either
rising/ falling- in the graph between points K and L although average cost falls,
marginal cost rises- but during that phase when both rises- MC rises at a higher
rate than AC.
(b) When average cost is rising then marginal cost must be above it but marginal cost
can either be rising / falling but during that stage when both falls, MC falls at a
faster rate than AC.
2 When marginal cost is above average cost it pulls average cost upwards whereas
when it is below average cost then it pulls average cost downwards whereas when
marginal cost is equal to average cost then it pulls it horizontally.
3. MC reaches its minimum point sooner than the AC.
4. MC begins to rise sooner than the AC it implies that at point of optimum capacity
-
when AC is minimum, MC intersects AC curve.
[MODEL QUESTION]
5. Discuss the limitations of Break-even analysis.
Answer:
The limitations of break-even analysis are discussed below:
i) Non-linear relationships: The basic Break-even-analysis postulates a linear
relationship, i.e., the unit variable cost and unit. selling price are assumed to remain
constant per unit of output but both of them are likely to change with output so that
the results of break-even-analysis may provide somewhat misleading .indication. To
verccme this, non-linear break-even-analysis may be attempted.
firms have cost-structures that include items which
i Complex cost structures: Many variable costs so that such cost-structures are not
cannot be classified as fixed or
easily amenable to Break-even-analysis.
assumes a standard
ii) Multiple products: In multiple-product-firm case BE analysis
product mix which presents difficulties in cost allocation.
iv) Varying Temporal incidences: Break-even-analysis ignores the
time value of
money. If costs and revenues occur at different points of time and there are
systematic differences in their temporal incidences (For examples, Fixed costs occur
revenues
before variable costs and both occur before revenue generation) cost and
must be expressed in present value terms.
be
v)Effect of change in costs and prices: Break-even analysis cannot and applied
usefully where cost and price data cannot be ascertained beforehand where
historical costs are not relevant for estimating future costs and prices.
Therefore if a
Break-even-chart is based on past data, those data should be adjusted for changes in
wages, for changes in prices of raw materials etc.
6. The cost, volume and profit relationship of a company is described by equation

Y Rs.3,00,000+ 0.7 X in which X represents sales revenue and Y represents the
total cost. Find out the following:
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POPULARPUBLICATIONS
(i) PV ratio
(ii) BE point
(iti) Sales volume required to earn a profit of Rs.90,000
(iv)Sales volume when there is a loss of Rs. 30,000 MODEL QUESTION
Answer:
Total cost = Fixed Cost + Variable Cost
=
or, Y = Rs. 3,00,000+0.7 X
(Where Y Total cost and X = Sales)
Variable Cost is 0.7 of Sales
Contribution = Sales- Variable Cost
= X-.7 X
0.3 X
()P/V Ratio =.
Contribution1003A100 =30%
Sales X
Fixed Cost
Ci)BE Point
P/V Ratio
Rs.3,00,000Rs.10,00,000
30%
(ii) Sales Volume for Eaming a Profit of Rs. 90,000
Fixed Cost +Profit
Sales
P/V Ratio
Rs.3,00,000+Rs.90,000Rs.
13,00,000
30%
(iv) Salés Volume at a loss of Rs. 30,000
Fixed Cost-Loss
Sales
P/V Ratio
3,00,000-Rs.30,000
=Rs.9,00,000
30%
7. a) Define Break even point. Represent the elements diagrammatically, and

derive the BEP and BEP sales algebraically.
b) The following data relates to ABC Co. for 2011:
Fixed Factory Overhead = Rs. 30,000
Fixed Selling Overheads = Rs. 6,000
Variable Manufacturing Cost per unit = Rs. 6.000
Variable Selling Cost per unit = Rs. 1.50
Selling Price Per unit= Rs. 12.00
Calculate
i)Break-even point in terms of units and BE sales in terms of rupees.
ii) Number of units that need to be sold to make a profit
of Rs. 45,000.
[MODEL QUESTION]
ECEN-16
Answer:
a) Break-even-point is that level of sales at which total cost and total revenue will be in
cquilibrium, i.c., it is that level of sales at which there is neither profit nor less. If actual
sales exceed Break-even-sales, then, there is profit but if actual sales are less than break
even-level of sales, then, there is loss.
Sales
10 Total cost
9
Variable cost.
8
Fixed overhead
9 (in 000) Output (Units)
Fixed cost
b) i) BEP(units)
Contribution (per unit)
Fixed Factory Overhead+ Fixedselling overhead
Selling price (per unit)- Variable cost per unit
30,000+6,000 36,00036,000-8,000units
12-(6+1.50) 12-7.50 4.50
BEP(Rs.=Fixedcost Fixed cost
P/Vratio Contribution(per unit)
Selling price(per unit)
36,000 36,000x1296,000Rs.
4.50 4.50
12
ii) No. of units needed to be sold to make profit of Rs. 45,000

Target profit+Fixedcost
Contribution(per unit)
ECEN-17
POPULARPUBLICATIONS
_45,000+36,000 81,000
=18,000 units.
4.50 4.50
Long Answer TypeQuestionsS

1. An Electicity Company wants to replace its machinery which was erected in the
year 1982 at a cost of Rs. 30, 00, 000
with a capacity of 300 MW. This consists of
material, labour and overhead in the ratio of 5: 3: 2 The present cost index
of
material, labour and overheads are 250, 300 and 240 respectively. The company
wants to increase its capacity in order to get the output to 600 MW now. By using
cost of indexes and power sizing model calculate the projected
replacement.
cost of
WBUT 20141
Answer:
By cost-index model,
Present cost of replacing machinery of 300 MW
= Present
material cost + Present labour cost + Present overhead cost
30,00,000x
10 100
30,00,000 3 300 30,00,000x
10 100
000
xx 240
10 100
37,50,000+27,00,000+14,40,000=78,90,000 Rs
Therefore, cost of replacing machinery 600MW

of =Double size of original
300MW
= 78,90,000x2= | 157,80,000 Rs.| Ans.
2. a) Discuss the Law of Demand.

Answer: WBUT 2014]
The multivariate demand function is converted
into single-variable function on the basis
of assumption that at a particular point of time all other
factors excepting the own price of
goods will remain unchanged such that
s}P,Pr,1,7,C, E,..
When we assume that all other factors to
be constant
i.e., Q=f (P) which means demand for a commodity by putting a. bar on each of them,
at a specific point oftime depend on
only the own price of the commodity.
Law of Demand states: Ceteri peribus i.e.,

consumers will demand less of a commodity other things being equal, at a higher price
and at a lower price
there is an inverse relation between price and demand more of it, thus
quantity demanded,
the same: but if these other factors which other things remaining
determine demand
the inverse price demand relationship may also undergo a change then
not hold good.
ECEN-18
b) Discuss the factors affecting the Demand. WBUT 2014]

Answer:
The demand of an individual consumer is influenced by the following factors
1. Own Price of goods: There is inverse relation between price and quantity, demanded
of a goods by a consumer the consumer demands more of a goods at a lower price

and less at a higher price, i.e., there is an inverse relationship between pwn price and
quantity demanded of a goods but this relationship is valid only when the income o
-
consumer, his tastes, preferences, habits etc. and the prices of its substitutes and
complementary goods are assumed constant, if any change occurs in any of these
factors then the inverse relationship between price and quantity demanded may not
hold good.
2. Price of related goods: The demand for goods is also affected by the price of related
goods as given in the following:
i) Competitive/ substitute goods: They are those goods when oné can be
consumed with almost equal ease and satisfaction in place of the other, e.g., tea
and coffee when price of coffee falls consumers may substitute coffee for tea
-
and consequently the demand for tea will fall,, when the price of a substitute for a
goods falls, the demand for that goods will decline and when the price of a
substitute for goods rises, the demand for such goods will rise it is because the
-
substitution effect in which fall in price reduces its relative price w.r.t. its
substitutes' price. resulting in it being relatively cheaper than its substitute. So
that it is demanded more at the expense of its substitutes.
in) Complementary goods: Two or more goods are complimentaries
to each other
when one possesses utility and is demanded when the other related goods are
available e.g., ball pen and refil, battery and transistor sets, milk and sweet etc..
in
In case of such goods, the rise in price of many of them will create a fall
demand of the others, e.g., when the price of ears rise, the demand for car will
fall which in turn will decrease the demand for petrol.
3. Income of. consumer: Since greater income means greater purchasing power
therefore when the income of the consumer rises, he can afford to buy more resulting
increase in demand of goods. This is due to the income etfect because constancy in
price increases real income of consumer resulting him demanding more goods.
Therefore for normal goods which exhibit a positive. income effect, demand
increases with increase of income of consumer whereas some inferior goods which
decrease with increase in
show negative income effect, i.e., their demand will to substitute
income of consumer, e.g., a rise in consumer's income will induce him
parmal rice (of inferior quality) by superior quality rice which will effect a fall in the
demand for parmal rice.
ECEN-19
income upon demand of a

Once again from the point of view of influence of consumer's
g0ods, the nature of the goods plays a vital role as in below
which is absolutely vital for human
Necessary goods: These are such goods to their demand and their demand
subsistence and existence, there is a limit
remains same with increase of income.
which makes life more
DComforts and luxuries: A commodity is a comfort enjoyed by a
enjoyable and luxury when it adds to the position and prestige
increase of
person in society. In case of such goods, their demand increases with
income of consumer.
consumer demand for
4. Subjective factors: An important factor which determines the
a goods is the tastes, preferences, habits, customs, conventions and fashions etc. The
subjective factors
demand of consumer of goods is influenced by a change in such
upon him of the customs
because a consumer's wants are affected by the influence
prevailing in society, by other people, by his ancestors, by his religion and by fashion
etc.
c) Why does Supply curve generally slope upward?

Suppose a market consists of three consumers A, B, and C whose individual
demand functions are given as
A:P 35-0.5Qa
B:P 50-0.25Qb
C:P40-2.00Qc
by
Find out the market demand function. If the market supply curve is given
Qs=40+3.5P then, determine price and quantity WBUT 2014]
Answer:
1st Part:
The supply curve slopes upward for the following reasons:
a) Law of Diminishing Marginal Productivity: As we produce
more and more
beyond a certain limit, the additional return to the variable factor diminishes.
Marginal and average cost of production increase as a result. This implies that
more quantity of the commodity can be produced and supplied only at a ngner
price so as to cover higher cost of production.
b) Profit Maximization: Producers supply a commodity to secure maximum
profits. An increase in the price of a commodity raises the level of profit, With
conditions of cost remaining the same.
So producers increase the supply of the commodity by releasing big quàntities from their
stocks. Similarly, lower price forces the producers to decrease the supply of the
commodity by building up their inventories with the expectation that the price may rise in
the future yielding larger profits.
ECEN-20
ECONOMIcSFOR ENGINEERS
2nd
Part:
Market demand function can be found by "the summation of the demand-functions of
three individual customers A, B and C, which is given by
3P=(35+50+40)-(0.5 +0.25 +2.00)0
3P 125-2.752
P 41.667-0.9170 is the market demand function.
Now, substituting P=41.667 0.9172 in the supply equation,

We get Q= 40 + 3.5(41.667-0.9170)
or, 40+145.8345 -3.20950
or, 4.20952= 185.8345
or, Q=44.146
Now, substituting =44.146 in the supply equation, we get,
44.146= 40 +3.5P
or, P 1.185
Therefore, Price is 1.185 and Quantity is 44.146m (Ans.)
3. Acertain index for the cost of purchasing and installing utility boilers is keyed to
1988, where its baseline value was arbitrarily set at 100. Company XYZ installed a
50,000 Ib/hour boiler for $525,000 in 2000 when the index had a value of 468. This
same company must install another boiler of the same size in 2007. The index is
2007 is 542. What is the approximate cost of the new boiler? [MODEL QUESTION]
Answer
The cost of new boiler of same size as installed in 2000
index value at current year (2007)
cost of old boiler installed in 2000x-
index value at past year (2000)
542
= 5,25,000x =6,08,0138 (approx.)
468
4.Discuss the factors which affect demand. [MODEL QUESTION]
Answer
The demand is influenced by the following factors:
5. Own Price of goods: There is inverse relation between price and quantity demanded
a
of a goods by a consumer the corisumer demands more of goods at a lower price
-
and less at a higher price, ie., there is an inverse relationship between own price and
quantity demanded of a goods but this relationship is valid only when the income of
-
hold good.
ECEN-211
OULARURLUCATONS
alsv atxtt by the

price ofelatot
at rwatod gunts: Ith dmant fir gts is
Ad
ds as ginem in thor tllming
Nhen ne can e
sudstitute Ns: hey ar thuse gotS
itivw' cguat ease aud satisfaction in piare ot
tthe otier, e.g, tea
i - nitd atuast sudstitute cotce for teu
nhen wir oft talls IsunaN M ot a substitute for
Y will tall.. when the prive tor a
a
NANanzN the demand ti» ta
derline and wen the price of a
is talls th demant fr that nds will suwd goNNds will rise
ise it is berause the
suhstitut tir auis rises the eunatnd tr its wlative price w.rt. its
sudstitutin ettirt in irh tall in prie nntars cheaper than its substitute So
sudstitutes' rir suting in it eing nelativelty
t skmandni me at the enuse otitssubstitres nplinientaries to each other
iv) Complementar goods: Two r nn gnds arv
when tne otner related goods are
wn one nses utiliy and is demanded when sets, milk and suwt ete
aailadde rg. hall u ani netill, batery und transistr
n cae ot sush gnnds the ri in price ot miny t tnea Will ereate a all in
demand ot the xhes, eg. den the pice of ers rise, the demand for car wil
all whish in tum will donase the denand tor petrol
Inne af oonsumer: Since greater invome meas ger purrluasing pow
can attord to buy more resulting
theetn nten the inone of the consumer rises, he in
n demand of goods. This is due to the income ettect because constaney
eas iinraes eal income of onsumer resulting hm denandng more demand
exhibit a positive income effect,
goods.
Therefr for nommal gaonds which
incrars with increase of inome of consunmer whereas sonie inferior goods which
show negatve income effect, ie., their demand will decrease with increase in
me ot consumar, cg, a rise in consumer's income will induce him to substitute
parmal ne (of inferior quality)) by superior quality rice which will effect a fall the
in
demand for pamal rice
Once again from the point of view of influence of consumer's income upon demand
of a goods the nature of the goods plays a vital role as in belov:
c) Necesan goods: These are such goods which is absolutely vital for human
subsistence and existence. there is a limit to their demand and their demand
remains same with incrase of income.
d Comforts and luxuries: A commodity is a comfort which makes life more
enjoyable and luxury when it adds to the position and prestige enjoyed by a
person in society. In case of such goods, their demand increases with increase of
income of consumer.
4. Subjective factors: An important factor which determines the consumer demand for
demand of consumer of goods is influenced by a change in such subjective factors
because a consumer's wants are affected by the intluence upon him of the customs
etc.
5. Size and compasition of population: Larger population ordinarily provides more
demand for goods, e.g., more vegetable vendors in thickly populated areas but
ECEN-22
ECONOMIL FOR ENGJINEEP
composition of population also affects, cg, if there are more children there will be
more demand for baby foods, toys etc. Whereas more old people in population will
demand more artificinl teth, more sticks etc,
6. Level and distribution of income: Iligher national income ordinarily mean more
demand for goods but distribution ofincome also plays an important role-ifincome
is distributed evenly among different sections of society, all of consumers are in a
osition to demand goods because of greater purchasing power but if income is
distributedd umevenly then, demand for commodities will be limited
6. Dlscuss tho factors whlch affoct supply. [MODEL QUESTIONJ

Answer:
Fnctors Affecting Supply
1. Prie:
It is of supply ofa commodity. The higher the price
the most important determinant
of the comnmodity, more of the commodity will be offercd for sale on account of
prolitability and vice-versa. The direct relationship betwcen price and supply of a
commodity is also referred to as the "law of supply'.
2. P'rices of Related Goods:
Supply of a commodity also depends upon the prices of the related goods by
affeeting its relative profitability. For instance, if the price of a substitute good goes
up, the producers will be tempted to produce that good to get higher
profit.
Similarly, if the price of the substitute good falls, production of other commodity will
become more profitable. On the other hand, the rise in the price of a complement
(say, petrol) will reduce the supply of the commodity (e.g. cars).
However, the
a
change in the quantity supplicd of one commodity is lesser in response to change
in
In the former case,
the price of other commodity than to change in its own price.
producers a commodity can shift to several alternative products,
when its price
of
falls.
3. Cost of Production:
in
Prices of the factors of production (raw materials, land, labour, capital, etc.) used
the production of a commodity constitute the cost of
production. If the prices of
In such a situation, the
these factors risc, the total cost of production goes up.
producers will divert their resources to the production of some other
commodity
using relatively less quantity of these factors, which can be produced at a lower cost.
For example, a rise in the price will discourage the production of agricultural
seeds, chemical
products. On the other hand, use of high yiclding varieties of
fertilizers, tractors, etc. reduce the per unit cost of production of agricultural
through the use of
products. The cost of manufacturing products can be reduced
sophisticated machines. Goods produced on large scale reduce the cost of production.
Better organization and management is one such important cause to reduce the cost
of production.
4. State of Technology:
The state of technology changes over time. Improvements technology increase the
in
profits, Discoveries and innovations also bring new variety of products. All this
ECEN-23
POPULARPUBLICATIONS
more than betore at the given

to raisc the supply upward. Firms supply
utes
price as a result.
5. Goal of Producer:
production also affects the supply
objective with which the producer undertakes
he commodity. producer may be to maximize total profits or
to
O ne The goal of the
status, goodwill and prcstige in
maximize sales to capture the market or to improve
production and generate morc
nc narket. Public enterprises whose goal is to increase
amount of commodity than
Cmployment to maximize social welfare supply larger
producers may also dccide to cut back production
prot motivated private firms. The Depression', the
or destroy stock in order to raise. prices. During the Great
were restricted through
production of rubber, tea and some other commodities
was thrown into the sea in
international agreements among the producers. Coffee
Brazil.
6. Natural Factors:
The supply of agricultural goods to a great extent depends upon the natural
conditions. If these, factors (like rain, fertility ot land, improved sceds, irrigation
facilities, climate etc.) are favorable, supply will increase. On the contrary,
earthquakes, heavy rains, floods, droughts adversely affect agricultural production.
India experienced large production in the agricultural sector on account of "Grcen
Revolution' and more supply of agricultural inputs, fertilizers, water supply
pesticides, credit, etc.
7. Means of Transportation, Communication, Banking ánd Insurance:
Proper development of infrastructure ensures adequate supply of the commodities.
case of short supply, goods can be brought from surplus areas to the deficient ones.
8, Length of time:
The supply of commodity' remains more or less fixed in the market period,
particularly, in case of perishable goods. In short period, the supply of a commodity
can beincreased by utilizing the capacity fully by altering the factor proportion. In
the long period, the output level can be adjusted fully.
9. Other factors:
Some other factors which affect the supply ofa commodity are expected changes in
prices, taxation and other policies of the Government, fear of war, strikes, lockouts,
veather, business conditions, degree of competition in the market, agreement among
the firms to earn large profits, nature of commodity, number of firms, etc.
6. The sales turnover and profit during two years were as follows:
Year Sales Rs. Profit Rs.
2011 1,50,000 20,000
2012 .1,70,000 25,000
You are require to calculate:
PV Ratio
Break-Even Point
profit of Rs. 40,000
The sales required to earn a are Rs. 2,50,000
The profit made when sales
Rs. 50,000
Margin of safety at a profit of
ECEN-24
Answer:
total cost and total revenue will be in
a) Break-cven-point is that level of sales at which
less. If actual
equilibrium, i.e., it is that level of sales at which there is neither profit nor
but if actual sales are less than break-
sales exceed Break-even-sales, then, there profit
is
even-level of sales, then, there is loss.
Sales
Total cost
10-
Variable cost
Fixed overhead
9 (in 000) Output (Units)->
Fixed cost
b) i) BEP(units=
overhead
Fixed Factory Overhead+ Fixed selling
Selling price(per unit)-Variable cost per unit
o+6,00036,000 36,000 =8,000 units
12-(6+1.50) 127.50 4.50
Fixed cost Fixed cost
BEP(Rs.)- Contribution(per unit)
p/vratio
Selling price (per unit)
36,000 36,000x12 96,000Rs.
4.50 4.50
12
make profit of Rs. 45,000

ii) No. of units needed to be sold to
cost
Target profit+Fixed
ECEN-17
POPULARPUBLICATIONS
45,000+36,000 81,000
units.
4.50 4.50
Long Atswer Type @uestions

Electicity Company wants to replace its machinery which was erected in the
year
year 1982
1982 at a cost of Rs. 30, 00, 000with a capacity of 300 MW. This consists of
aterial, labour and overhead in the ratio of 5: 3: 2 The present cost index of
eria, labour and overheads are 250, 300 and 240 respectively. The company
ants to increase its capacity
power
in order to get the oútputto 600 MW now. By using
cost of indexes and sizing model calculate the projected cost of
replacement. WBUT 2014]
Answer:
By cost-index model,
Present cost of replacing machinery 300 MW
of
Present material cost + Present labour cost + Present overhead cost
30,00,000x 30,00,00xx10 100
30,00,000x
10 100
= 37,50,000+27,00,000+14,40,000 =78,90,000Rs.
Therefore, cost of replacing machinery,aof 600M

600 MW
-Double size of original
00 Mw
300MW
78,90,000x2=157,80,000 Rs. Ans.
2. a) Discuss the Law of Demand. WBUT 2014]

Answer:
The multivariate demand function is converted into single-variable function
on the basis
of assumption that at a particular point of time all other factors excepting the own price
of
goods will remain unchanged such that
= s{P,Pr,,T,C,E,.
When we assume tha all other factors to be constant by putting
a bar on each of them,
i.e., Q= f (P) which means demand for a commodity at a specific point time depend
of on
only the own price of the commodity.
Law of Demand states: Ceteri peribus 1.6., other, things being equal, at higher
a price
consumers will demand less of a commodity and at a lower
price demand more of it, thus
there is an inverse relation between price and quantity demanded, other
things remaining
the same: but if these other factors which determine demand also
undergo a change then
the inverse price demand relationship may hot hold good.
ECEN-18
b)Discuss the factors affecting the Demand. WBUT 2014]

Answer:
The demand of an individual consumer is influenced by the following fäctors
1. Own Price of goods: There is inverse relation between price and quantity demanded
of a goods by a consumer the consumer demands more of a goods at a lower price
-
and less at a higher price, i.e., there is am inverse relationship between own price and
quantity demanded of a goods - but this relationshipis valid only when the income of
hold good.
2. Price of related goods: The demand for goods is also affected by the price of related
i) Competitive/ substitute goods: They are those goods when one can be
consumed with almost equal ease and satisfaction in place of the other, e.g., tea
and coffee when price of coffee falls consumers may substitute coffee for tea
and consequently the demand for tea will fall,, when the price of a substitute for a
goods falls, thè demand for that goods will decline and when the price of a
substitute for goods rises, the demand for such goods will rise it is because the
-
substitution effect in which fall in price reduces its relative price w.r.t. its
substitutes price resulting in it being relatively cheaper than its substitute. So
ii) Complementary goods: Two or more goods are complimentaries to each other
when one possesses utility and is demanded when the other related goods are
available e.g., ball pen and refill, battery and transistor sets, milk and sweet.etc.
In case of such goods, the rise in price of many of them will create a fall in
demand of the others, e.g, when the price of ears rise, the demand for car will
fall which in turn will decrease the demand för petrol.
3. Income of consumer: Since greater income means, greater purchasing power

therefore when the income of the consumer rises, he can afford to buy more resulting
increase in demand of goods. This is due to the income ettect because constancy in
price increases real income of consumer resulting him demanding more goods.
Therefore for normal goods which exhibit a positive income effect, demand
increases with increase of income of consumer whereas some inferior goods which
show negative income effect, i.e., their demand will decrease with increase in
income of consumer, c.g., a rise in consumer's income will induce him to substitute
parmal rice (of inferior quality) by superior quality rice which will effect a fall in the
demand for parmal rice.
ECEN-19
POPULARPUBLICATIONS
Cgain from the point of view of influence of consumer's income upon demand of a
gOods, the nature of the goods plays a vital role as in below:
aNecessary goods: These are such goods which is absolutely vital for human
demand
Subsistence and existence, there is a limit to their demand and their
remains same with increase of income.
DComforts and luxuries: A commodity is a comfort which makes life more
enjoyable and luxury when it adds to the position and prestige enjoyed by a
person in society. In case of such goods, their demand increases with increase of
income of consumer.
4. Subjective factors: An important factor which determines the consumer demand for
demand of consumer of goods is influenced by a change in such subjective factors
because a consumer's wants are affected by the intluence upon him of the customs
etc.
c) Why does Supply curve generally slope upward?

Suppose a market consists of three consumers A, B, and C whose individual
demand functions are given as
A:P 35-0.5Qa
B:P-50-0.25Qb
C:P 40-2.00Qc
Find out the market demand function. If the market supply curve is given by
Qs-40+3.5P then, determine price and quantity. WBUT 2014]
Answer:
1s Part:
The supply curve slopes upward for the following reasons:
a) Law of Diminishing Marginal Productivity: As we produce more and more
beyond a certain limit, the additional return to the variable factor diminishes.
Marginal and average cost of production increase as a result. This implies that
more quantity of the commodity can be produced and supplied only at a higher
price so as to cover higher cost of production.
b) Profit Maximization: Producers supply a commodity to secure maximum
profits. An increase in the price of a commodity raises the level of profit, with
conditions of cost remaining the same.
So producers increase the supply of the commodity by releasing big quantities from their
stocks. Similarly, lower price forces the producers to decrease the supply of the
commodity by building up their inventories with the expectation that the price may rise in
the future yielding larger profits.
ECEN-20
2d Part:
Market demand function can be found by thé
summation of the demand-functions of
three individual customers A, B and C,
which is given by
3P (35+ 50 + 40)-(0.5+0.25+2.00)
3P 1252.752
P=41.667-0.9170 is the market demand function.
Now, substituting P=41.667 0.9172 in the.supply equation,
We get Q=40+ 3.5(41.667 0.9172)
or, O= 40 +145.83453.20950
or, 4.2095Q= 185.8345
or, Q-44.146
we get,
Now, substituting Q=44.146 in the supply equation,
44.146=40 +3.5P
or, P= 1.18S
Therefore, Price is 1.185 and Quantity is 44:146m (Ans.)
utility boilers is keyed to
3. Acertain index for the cost of purchasing and installing
1988, where its baseline value was arbitrarily set
at 100. Company XYZ installed a
50,000 Ib/hour boiler for $525,000 in 2000 when
the index had a value of 468. This
same company must install another boiler of the
same size in 2007. The index is
2007 is 542. What is the approximate cost of the
new boiler? [MODEL QUESTION]
Answer: in 2000
The cost of new boiler of same sie as installed
index value at current year (2007)
= cost of old boiler installed in 2000x-
index value at past year (2000)
54
= 5,25,000x*=6,08,013S (approx.)
468
IMODEL QUESTION]
4. Discuss the factors which affect demand.
Answer:
factors:
The demand is influenced by the following
5. Own Price of goods: There is inverse
relation between price and quantity demanded
the cornsumer demands more of a goods at a lower price
of goods
a by a consumer- own price and
price, i.e., there is an inverse relationship between
and less at a higher
relationship is valid only when the income of
quantity demanded of a goods but this
-
consumer, his tastes, preferences, habits etc.

and the prices of its substitutes and
it any change occurs in any of these
complementary goods are assumed constant,
price and quantity demanded may not
factors then the inverse relationship between
hold good.
ECEN-21
6. Price of related goods: The demand for goods is also affected by the price of rela
iii) Competitive/ substitute goods: They are those goods when one can 6.
consumed with almost equal ease and satisfaction in place of the other, eg, ta
and coffee when price of coffee falls consumers may substitute coffee for te
and consequently the demand for tea will fall,, when the price of a substitute fora
goods falls, the demand for that goods will decline and when the price of a
substitute for goods rises, the demand for such goods will rise it is because th
-
substitution effect in which fall in price reduces its relative price w.r. is 5.1
Am
substitutes' price resulting in it being relatively cheaper than its substitute.
SoA
Fa-
iv) Complementary goods: Two or more goods are complimentaries to each other 1.
when one possesses utility and is demanded when the other related goods ar
available e.g., ball pen and refill, battery and transistor sets, milk and sweet et
In case of such goods, the rise in price of many of
them will create a fall in
demand of the others, e.g., when the price of ears rise, the demand for car
fall which in turn will decrease the demand for petrol. wil2.2.
7. Income of consumer: Since greater
incom means greater purchasing power
therefore when the income of the consumer
rises, he can afford to buy more resulung
increase in demand of goods. This is due
to the income effect because constancy
price increases real income of consumer
Therefore for normal goods which
resulting him demanding more goo
exhibit a positive income effect, dema
increases with increase of income
show negative income effect, i.e.,
of consumer whereas some inferior goods whic
their demand will decrease with increase u
income of consumer, e.g., a rise in consumer's
parmal rice (of inferior quality) by income will induce him to substiu
demand for parmal.rice. superior quality rice which will effect a fal n us
Once again from the point
of view.of influence of consumer's and
3.
of a goods, the nature of the income upon dena
e) Necessary goods: These goods plays a vital role as in
are such goods which is below:
subsistence and existence, absolutely vital for hun
remains same with increase
there is a limit to their demand and their dema
d) Comforts and of income.
luxuries: A commodity is
enjoyable and luxury when a comfort which makes ore
person in society. n case it adds.to the position and lile

of such goods, prestige enjoyeu
income of consumer. their demand increases
4. Subjective factors:
with increa
An important factor
a goods is the tastes, preferences, which determines for
habits, customs, the consumer demaThe
demand of consumer conventions and fashions e
of goods
because a consumer's wants is influenced by a change
are affected by in such subjective
ubjective fac
prevailing in society,
by other people, by the influence upon him of the toms 4.
his religion and byio
etc. his ancestors, by
5. Size and composition la
demand for goods, of population: Larger population ordinarily more
e.g., more vegetable providesuf
vendors in thickly,
ECEN-22 populated arca but
diftatim
LCONOMICIORUNGINLLRS
composition of population also aflccts, c.g, if there are morc clhikdren therc will be
more demand for baby foods, toys ctc. Wliereas nmore old pcople in population will
demand more artificial tecth, more sticks ctc.
6. Level and distribution of income: ligher natíonal incomc ordinnrily mean more
demand for goods but distribution of inconc ulso plays an important role
if income
-
is distributed evenly among differcnt scctions of society, all

of consumers are in a
position to demand goods because of greater purchasing power but
if inconc is
distributed uncvenly then, demand for commoditics will be limited,
6. Dlscuss tho factoro which affoct supply. (MODEL QUESTIONJ

Answer:
P'actors Affccting Supply
1. Price:
It is the most important determinant
a
of supply of commodity. The higlier the price
of tie' commodity, more of the eommodity will be offered for sale on nccount of
profitability and vice-versa. Tho direct relationship between price and supply of a
commodity is also relerred to as the 'law of supply'.
2. Prices of Related Goods:
Stupply of a commodity also depends upon the prices of the related goods by
affectinng its relative profilability. For instance, if the price of a substitnte good yoes
up, thhe producers will be tempted to produce that good to yct higlher prolfit.
Similarly, if the price of the substitute good falls, production of other comodity will
becomc nmore prolitalble. On the other hand, the risc in the price of a complement
(sny, petrol) will reduce the supply of the commodity (c.g, cars). Ilowever, thec
change in tlhc cquntity supplied of onc connodity is lesser in rcsponse to a changc in
the pricc of other commodity than to clhange in its own pricc. In the former ca5c,
producers of a comnodity can shin to several alternative products, whien its price
falls.
3. Cost of Production:
Prices of the factors of production (raw materials, land, labour, cupital, cte.) used in
the production of a commodity constitute the cost of proxduction. If the prices of
these factors rise, the total cost of production goes up. In such a situation, the
producers will divert their resources to the production of some other commodity
a
using relatively less quantity of these factors, wlhich can be produced at lower cost.
For example, a rise in the price will discourage the production of agricultural
products. On the other hand, usc of higl yickding varictics of secds, chemical
fcrtilizers, tractors, ctc. reduco the per unit cost of production of agricultural
products. The cost of manufacturing products can be reduced through the usc of
Soplisticated machines. Goods produccd on large sealc rediuce thc cost of production.
Better organization and management is one such imporlant cause to reduce the cost
of production.
4. State of Technology:
The statc of technology changes over time. Improvements in teclhnology increase the
profits, Discoveries and innovations also bring new varicty of products. All this
ECEN-23 sa
ýata lgn
supply more than betforc at the given

contributes to raise the supply upward. Firms
price as a result.
5. Goal of Producer:
undertakes production also affects the supply
The objective with which the producer orto
producer may be to maximize total profts
of the commodity. The goal of the
status, goodwill and prestige in
maximize sales to capture the market or to improve
increase production and generate more
the market. Public enterprises whose goal is to
amount of commodity than
employment to maximize social welfare supply larger
also decide to cut back production
profit motivated private firms. The producers may
or destroy stock in order to raise prices.
During the Great Depression', the
restricted through
production of rubber, tea and some other commodities were
into the sea in
international agreements among the producers. Coffee was thrown
Brazil.
6. Natural Factors: natural
The supply of agricultural goods to a great extent depends upon the
irrigation
conditions. If these, factors (like rain, fertility of land, improved seeds,
contrary,
facilities, climate etc. are favorable, supply will increase. On the
production.
earthquakes, heavy rains, floods, droughts adversely affect agricultural
India experienced large production in the agricultural sector on account of
"Green
Revolution' and more supply of agricultural inputs, fertilizers, water supply

pesticides, credit, etc.
1. Means of Transportation, Communication, Banking and Insurance:
Proper development of infrastructure ensures adequate supply of the commodities. li
case
of short supply, goods can be brought from surplus areas to the deficient ones.
8. Length of time:
The supply of commodity remains more or less fixed in the market perio
particularly, in case of perishable goods. In short period, the supply ofa commouy
can be increased by utilizing the capacity fully by altering the factor proportion.
the long period, the output level can be adjusted fully.
9. Other factors:
Some other factors which affect the supply of a commodity are expected changes
prices, taxation and other policies of the Government, fear of war, strikes, locxu
weather, business conditions, degree of competition in the market, agreement amo
the firms to eam large profits, nature of commodity, number of firms, etc.
6. The sales turnover and profit during two years were as follows:
Year Sales Rs. Profit Rs.
2011 1,50,000 20,000
2012 1,70,000 25,000
You are require to calculate:
PV Ratio
Break-Even Point
The sales required to earn a profit of Rs. 40,000
The profit made when, sales are Rs. 2,50,000
Margin of safety at a profit of Rs. 50,000
ECEN-24
ECONOMISFORENGINEERS
Variable costs of the two periods [MODEL QUESTION]

Answer:
Ratio=Contribution
(i)P/V
Sales
Changes in contribution in two periods
Changes in sales in two periods
Changes in profit in two periods
Changes in sales in two periods
(Since, fixed expenses remain constant)
Rs.25,000-Rs.20,000
or 25%
Rs.1,70,000-Rs.1,50,000 4
ii) To calculate break-even point, it is necessary to find out fixed expenses.
Contribution in the year 2011 when sales are Rs. 1,50,000 and P/W ratio is -
=
SalesxP/N Ratio=1,50,000x Rs.37,500
4
We know that:
Fixed Expenses = Contribution- Profit
= Rs. 37,500- Rs. 20,000 Rs. 17,500
Fixed Expenses
Break Even Point
P/VRatio
17,500Rs.70,000
(in) Sales required to earn a profit of Rs. 40,000

Contribution = Fixed Expenses + Profit
= Rs. 17,500+ 40,000 Rs. 57,500
Sales required to earn a contribution of Rs. 57,500
Contribution
P/V Ratio
57,500=57,500 x4/1 Rs.2,30,000
4
(iv) Profit when salcs are Rs. 2,50,000:
ECEN-25
POPULARPUBLICATIONS
Contribution = SalesxP/V Ratio
=2,50,000x= Rs.62,500
4
Profit Contribution-Fixed Expenses
Rs. 62,500-17,500Rs. 45,000
(v) Margin of safety at a profit of Rs. 50,000:

Profit
Margin ofsafctyp/V Ratio
0,00050. 000 x4 =Rs.2,00,000x4
(iv) Variable cost of two periods

Variable cost = Sales- Profit-Fixed Expenses
Rs. 1,12,500
Year 2011= Rs. 1,50,000-20,000 17,500 = Rs. 1,27,500
Year 2012 =Rs. 1,70,000-25,000- 17,500
7. Suppose that an aircraft manufacturer desires to

make a preliminary estimate of
assembly of its new long
the cost of building a 600-MW fossil fuel plant for the $100 million 20 years ago
distance aircraft. t is known that a 200-MW plant costs index in now 1200. The
when the approximate cost index was 400 and that
cost
[MODEL QUESTION]
cost capacity factor for a fossil fuel power plant is 0.79.
Answer: years ago
Cost of building a 200- MW plant 20 100 million$
Cost of building a 200 MW plant 20 now
-
years agox- Cost index now

= Cost building a 200-MW plant 20
Cost index 20 years ago
200
= 100 millionSx =300 millionS
400
Now, cost of building 600 MW-plant now,
cost capacity factor
S1Z Of new plant
FCost building a 200-MW plant nowx
size of old plant
300milliond 600 MW T079
200 MW J
= 300millionSx 3=714.57 millionS (approx.)
ECEN-26
ECONOICS FOZ EANEERS
REPLACEMENT AND MAINTENANCE

ANALYSIS
Multipie Choice Type Question
1. Vith Which term "maintenance prevention" is primarily associated:
IBUT 2914]
maintenance
a) preventive b) Total predictive maintenance
c) Rik based maintenance d) Corrective maitenance.
Answer: (a)
2. f an existing equipment is considered with a new equipment then the exisúng

equipment is known as MODEL OUESTI01
a) Defender b) Challenger
c) Replacer d) None of these
Answer: (e)
3. Preventive maintenance is aimed to AODEL QUESTION

a) defect potential failures
reduce cost of production
b)
c) increase efficiency
d) None of these
Answer: (a)
4. Breakdown maintenance is MODEL OUESTION]

a) run it till it breaks' maintenance
b) still a predominant mode of maitenance
c) done after the machine has reached down state
d) all of the above
Answer: (d)
Short Answer 1ype Questions

1. Discuss the concept of challenger and defender. MODEL OUESTION]
Answer:
new ezuipmert, then the
f 2 exising equipment is considered for replacement wth a
EXISing equipment is known 2s the defender and the new
equiprnent is koun
chailenger.
5,90,
Assume that an equipmenm has been purchzsed zbout three yeers back for Rs.
2nd in is considered for replzcenent ilh 2 ne equiprnat. The supplier f the new
cquipmert will take the old one for some mone, }, Rs. 395999. This shruld te
exising czuipment znd it should te cnsidered fur all
Lred as te preset value of thepurchase
furtiher economic anzlysis. The value oí the ezisting eguipmet before three
years is sow known 2s sunk cost, and it shouid not be cmsidered for funher aralysis.
ECEN-27
maintenance and preventing maintenance.

2. Distinguish between break down IMODEL QUESTION]
Answer: types: preventive maintenance and

Maintenance activity can be classified into two
is the periodical inspection and
breakdown maintenance. Preventive maintenance (PM)
service activities which are aimed to detect potential
failures and perform minor
problems in future. Breakdown
adjustments or repairs which will prevent major operating
equipment has attained down
maintenance is the repair which is generally done after the
associated penalty in terms of
state. It is often of an emergency nature which will have
Preventive
expediting cost of maintenance and. down time cost of equipment.
maintenance will reduce such cost up to a point. Beyond that point, the cost of
preventive
maintenance will be more when compared to the breakdown maintenance cost.
'The total
cost, which is the sum of the preventive maintenance cost and the
breakdown
maintenance cost, will go on dècreasing with an increase in the level of maintenance up
to a point. Beyond that point, the total cost will start increasing. The level of maintenance
corresponding to the minimum total cost is the optimal level of maintenance.
3. A fleetowner finds from his past records that the costs per year of running a
vehicle whose purchase price is Rs.50,000 are as under:
Year 1 2 3 4
Ruhning cost (Rs.) 5,000 6,000 7,000 9,000 11,500 16,000 18,000
Resale value (Rs.) : 30,000 15,000 7.500 3,750 2,000 2,000
Thereafter, running cost increases by Rs.2000, but resale value remains constant
2,000
at Rs.2000.
At what age is a replacement due? [MODEL QUESTION
Answer:
Here, we are given the running cost s(), the resale price
s() and the. capital cost
Rs.50,000. Let it be profitable to replace the vehicle after n years. Then, n is determined
by the minimum value of T. The values of T, for each year of the problem are
computed below:
(1_ (2) (3) 4) (5) 6H3H5) (DH6n.
ear
(n) s) s) C-s( T TA
0
5,000 5,000 30,000 25,000

20,000 25,000
6,000 11,000 15,000 23,000
35,000 46,000
7,000 18,000 7,500 20,167
42,500 60,500
9,000 27,000 3,750 18,312
46,250 73,250
11,500 38,500 2,000 48,000 17,300
16,000 86,500
54,500 2,000 48,000 17,085
18,000 1,02,500
72,500 2,000 17,214
48,000 1,20500
This table indicates that the minimum total average
cost (T) is minimum during tne
year. Hence the vehicle should be replaced after every
sixth year..
ECEN-28
ttne
4. Write short note on Minimum cost life of a new asset. [MODEL QUESTION]
Answer:
The minimum cost life of any new asset is the years at which the EUAC is minimized.
This cost life should be lesser than the actual / physical life of an asset, due to the
increase of operating & maintenance cost in the later years of asset.
Before analyzing the minimum cost life for any new asset, following points are to be
considered.
a) Generally cost of operation & maintenance of a machine increases due to passage of
time.
b) The replacing machine [defender] time should be fixed.
cReplacement policy for gradual deterioration
d) Salvage value to be determined prior to the decision making.
e) Time value of replacing asset.
is minimum. This
As discussed the replacement decision would be at which the EUAC
calculation can be made in two aspects..
EUAC= Price of equipment- value of machine after life
[i.e., salvage value]+ Maintenance cost for the years.
The process:
TC-(C-SV)+M(t) and
t1
Average TC[EUAC]= (c-sv+M()||

t
Here, C Cost of the machine, S.V.- Salvage value and
M(t)=cumulative maintenance cost.
Minimum Cost Life
Years
The Life Cycle Cost can be explained by a

curve which indicates the total operating cost
as well as the economic life of the new
for the asset (value on the Life Cycle Cost axis)
Intervention axis) at each possible replacement
asset (coresponding value on the Year of
replacement timing is calculated by
interval. The Life Cycle cost for a new asset at each
taking the sum of the annualized capital
costs and the annualized risk costs.
ECEN-299
POPULARPUBLICATIONS
Long Answer Typc QuestionsS
1. a) Machine Acosts Rs.9,000. Annual operating cósts are Rs.200 for tho tlrest yoar
yoar. Determine thho bobost ago at which
and then increase by Rs.2,000 every
policy
replace the machine. If the optimum replacoment machine?
operating the
s
followod, what wil will be
the average yearly cost of owning and costs aro Rs.400 for tho firstw yoa
b) Machine B costs Rs.10,000. Annual operating
y.
You now have a machino of typo A
and then increase by Rs.800 every year. B, if, so when? [MODEL QUESTION
which
is one year old. Should you replace is with
Answer:
Then, tor machine A, the averao
a) Let the machine have no resale valuc when replaced.
rage
total annual cost T, is computed as follows:
(1) (2) (3) (4) 5)-C-uil (6)=3HS) ()-(6/n
Year
s) s) C-s) 7 T
200 200 Nil 9,000 9,200 9,200

2,200 2,400 Nil 9,000 11,400 5,700
4,200
6,200
6,600
12,800
.
Nil
Nil
9,000
9,000
15,600
21,800
5,200
5,450
8,200 21,000 Nil 9,000 30,000 6,000
This table shows that the best age for the replacenment of machinc A is 3 year. The
average yearly cost of owning and operating for this period is Rs.5,200.
(b) For machine B, the average cost per year can similarly be computed as given in the
following table:
Year
(n) S) s) C-s() T T
400 400 Nil 10,000 10,400 10,400
10,000 S,800
1,200 1,600 Nil 11,600
2,000 3,600 Nil 10,000 13,600 4,533
2,800 6,400 Nil 16,400 4,100
10,000
3,600 10,000 Nil 10,000 20,000 4,000*
4,400 14,400 Nil 4,066
10,000 24,400
This table indicates that the machine B should be replaced after every 5 years
average yealy cost of owning and operating forthis is Rs.4,000.
Now, the average total cost of one year old machine A is Rs.5,700 during the first year
Rs.5,200 during the 2 year and Rs.5,450 during the third year. It is obvious that the
average total cost for machine B does not cxceed that the
of one ycar old machine A in
3 year. Hence, machine A should be replaced with machine B during the 3" year.
ECEN-300
ECONOMICSFORENGINEERS
2. The cost of a new machine is Rs.5,000. The maintenance cost of nth year is
=
given by C, 500(n-1);n=1,2,. Suppose that the discount rate per year is
0.5. After how many years it will be economical to replace the machine by a new
one? [MODEL QUESTION
Answer:
We are given
V=0.5, A = Rs.5,000
and C,500(-1), n=1,2,...
It n denotes the number of years for the optimum replacement, then to determine n, we
compute the following table:
Year 4+2C
(n) C (0.5) C- A+C k=1
1.0000 0.00 5,000 1.0000 5,000.00

2 500 0.5000 250.00 5,250 1.5000 3,500.00
3 1,000 0.2500 250.00 5,500 1.7500 3.142.86
1,500 0.1250 187.50 5,687.50 1.8750 3,033.33
2,000 0.0625 125.00 5,812.50 1.9375 3,000.00
2,500 0.0312 78.00 5,890.50 1.9697 *2,992.07
3,000 0.0156 46.80 5,937.30 1.9843 2,992.13
From this table, we conclude that

2500<2992.07<2992.13
since the running cost of 6t yearis 2500 and that of 7" year is 3000, it is always
economical to replace the machine by a new one after 6 years.
ECEN-31
POPULAR PeucATONE
DEPRECIATION METHOD
Mpe Cosce Typegiestlons
20,SO0 don paymant
1.A machine worth Rs. 1,00 is purchaed by paying Rs.
ard 12 morthty instaiments cf Rs. 2,000 each. The book cost at time of purchass
is
a) Rs.1,00O b) Rs.2000
c) Rs. 200 d) Rs. 12,000
ARswer: (2)
2. A machine worth Rs. 1,0000 is purchaze by paying Rs. 20,000 don paymert
and 12 monthly installments of Rs. 2000 each. The book cost at tins of purchass
DMODEL OUESTIOM
a) Rs.1aO b) Rs. 2,0
c) Rs. 20DO d) Rs. 12S00
Amswer: (2)
3. The cost of an azst is Rs. a,p00, tfe erpected is 3 years and scrap vaue
eatimated is Rs.1,000. The rate cf depreciztion underwrittsn-dorn-ralue metheds
a) 3333% b) e66% MODEL QUESTION
c) 50% d) 25%
Amswer:()
4. A company purcha2sed machinery for Rs. 25,000 on 1 January, 2005 and yet
Rs. 5000 on its installatíon and Rs. 2,500 on its transportation. The uzeful Hed
the machine is 5 years. Yhat wil be the depreciation accordíng to the sum of years
digits method in the last year of working ffe of the nachine? JAODEL OUESTIO!
a) 2,167 b) 2,162
c) 2,163 d) 2,170o
Answer:(a
5hot Anzer Type Cuesions

1. From the folosing information calcutate the annual depreciatíon based
historical and repacement cost respectivety and show the amount of addDO
depreciation that shoud be provided in each year..
Cost of machinery Rs. 20,000
Estimated tife 4 years
Residual Value NIL
nflation factor 10% pa
Use straightfine method for computing depreciation. MODEL QUESTION
Answer:
Nomiral deprecizdiom per annun
ECEN-32
Original cost- Residualvalue

Estimated life in years
20,000-Nil_5.000Rs.per
annum
4
Current value of asset afterinflation 20,000x1.10=22,000 Rs.
Additional depreciation to be charged per annum
22,000-NIl5.000 = 5.400-5,000=
400 Rs.
4
2: The first coat of a road laying machine is Rs. 80,00,000. Its salvage value after
five years is Rs. 50,000. The length of road that can be laid by the machin during
its Iifetimeis 75,000 km. In its third year of operation, the length of road laid is
2,000 km. find the depreciation of the equipment for the year. [MODEL QUESTION]
Answer:
P= Rs. 80,00,000
F Rs. 50,000
X= 75,000
x=2,000 km
Depreciation for x units of service in a period =
X
x
(8000000-50000),2000-
Depreciation for year Rs. 2,12,000
75000
Long Aswer 1PE.Ouestlons

M/s. Bengal Co. purchased
1. a machine on 1st July 2011 at a cost of Rs. 1,00,000
The scrap value of the machine was estimated at Rs. 10,000 and its life at 10 years.
On 1st January, 2012 another machine of same type was purchased at a ost of Rs.
44,000. The scrap value of the machine was estimated at Rs. 6,000 and its life at
10years.
The installation cost of the first and second machine were Rs. 10,000 and Rs. 2000
respectively. Show the machinery account and depreciation account for 2011 and
2012 assuming book are closed of 31st December every.year. WBUT 2015]
Answer
Machinery Account
Dr. Cr.
Rs. Rs. Rs. Rs.
2011 2011
July 1 To Bank A/c 1,10,000 Dec. 31 By depreciation 5,000
(1,00,000+ 100000-10000)
10,000) 2x10
Dec. 31By balance c/d 1,05,000
ECEN-33
1,10,000
2012
2012
1,10,000
Jan 1
Tobalance b/d 1,05,00o|Dec 31
Jan 1
To Bank A/c
By depreciation 14,000
(44,000+2,000)46,000 Dec 31
By balance c/d 1,37,000
1,37,000
1,51,000
151,000
Depreciation Account
Dr.
Rs.
2011 Rs.
Rs. Rs.
C
Dec. 31 2011
To Machinery Alc 5,000|Dec. 31 By profit & loss 5,000
2012 A/c
Dec. 31 2012
ToMachinery Alc 14,000Dec. 31 By profit
& loss 14,000
A/c
Working
1. We assume straight
line method of depreciation.
2. Depreciation per annum = Original cost - scrap value
No. of years machine
3. Original cost= Purchase of life
price + Installation cost
4. 4. We assume, accounting
5. year = Calendar year
Depreciation charged on
Dec. 31, 2012
First Machine (5,000x2)

10,000
. 2td Machine
Total
=46,000-6,000
10
4,000
14,000
2. Write short note on Straight
line method of depreciation with suitable examples.
Answer: WBUT 2015
Under the straight line method,
a fixed and equal amount
according to a fixed percentage in the form of depreciation,
on the original cost, is written
period over the expected useful off during each accounting
life of the asset.
How to calculate the Rate
of Depreciation under SLM:
calculated as follows: The rate of depreciation 1s
Step Amount of Depreciation =Originalcost less Residual value
1:
Expected useful life of the asset

Step 2: Rate of Depreciation= Amount of Depreciation100
Original Cost
ECEN-34
Example:
Purchase Price Expenses to be Estimated Expecteduseful
of Machine Capitalized Residual value Life
Rs Rs.
Rs
80,000 20,000 40,000 4 years
Calculation of Total Cost of Asset

Total Cost of Asset = Purchase Price + Expenses to be capitalized
Rs. 80,000+
Rs. 20,000=Rs. 1,00,000
Calculation of Amount of depreciation per year
Calculation of Rate of Depreciation in SLM

Amountof Depreciation
Rate of Depreciation (under SLM)= x100
Total cost of Asset
15,000100-15%
1,00,000
15,000100 =15%
Case(a)
1,00,000
Total cost of Asset- Estimated Residual Value
Amount of Depreciation=
Expected useful life
1,00,000-40,000Rs.15,000
3: What isdepreciation? What are the causes of depreciation? Discuss the need of
charging depreciation. MODEL QUESTIONJ
Answer:
Meaning of Depreciation Accounting
According to the American Institute of Certified Public Acountants
(AICPA)
Depreciation Accounting is a system of accounting which aims to distribute cost of the

basic value tangible capital assets less salvage (if any) over the estimated useful life of
of
the unit (which may be group of assets) in a systematic and rational manner. It is a.
process of allocation and not of valuation.
Causes of Depreciation
1. Physical wear and tear: When the fixed assets are put
to use, the value of such
assets is said to be due to physical
assets may decrease. Such decrease in the value of
wear and tear.
2. With the Passage of time: When the assets are
exposed to the forces of nature like
decrease even if they are not
weather, winds, rains etc. the value of such assets may
put to any úse.
ECEN-35
POPULARPUBLICATIONSs
3. Changes in the economic environment: The values of an asset may decrease due to
decrease in the demand of the asset. The demand of the asset may decrease due to
technological changes, changes in the habits of consumers etc.
4. Expiration of legal rights: When the use of an asset (e.g. patents, leases) is
governed by the time bound arrangement, the value of such assets may decrease with
the passage of time.
Need for Charging Depreciation

The need for charging depreciation in accounting records arises due to any one or more
of the following objective to be achieved.
1. To ascertain truc results of operations: For proper matching of costs with
revenues, it is necessary to charge the depreciation (cost) against, income (revenue)
in each accounting period. Unless the depreciation is charged against income, the
results of operations would stand overstated. As a result the income statement would
fall to present a true and fair view of the result of operations of an accounting entity.
2. To present True and Fair view of financial position: For presenting a true and fair
view of financial position it is necessary to charge the depreciation. If the
depreciation is not charged, thé unexpired cost of the asset concened would be
Overslated. As a result the position statement (i.e., the Balance Sheet) would not
present a true and fair view of the financial position of. an accounting entity.
3. To ascertain the true cost of production: For ascertaining the cast of production, it
is necessary to charge depreciation as an item of cost of production. If the
depreciation on fixed assets is not charged, the cost records, would not present a true
and fair view of the cost of production.
'4. To comply with legal recruitments: In case of companies, it is compulsory to
charge depreciation on fixed assets before it declares dividend.
5. To accumulate funds for replacement of assets: A portion of profits is
set aside in
the form of depreciation and accumulated each year to provide a definite amount at a
certain future date for the specific purpose of replacement
useful life.
of the asset at the end of its
ECEN-36
ECONOMICS FOR ENGII FERS
CASH FLOW ANALYSIS

Multiple Choice
Type Questions
1. A person if deposits Rs. 50, 000 in bank at an interest of 10% compounded
annually, then the future value at the end of 5% years will be: [WBUT 2014]
a) 80, 525 b) 70, 525 c) 85, 525 d) 90, 525
Answer: (a)
2. Which of the following statement is not correct against payback period:

WBUT 2014].
a) All the economic consequences beyond the payback period are completely
ignored
b) This is an approximate, rather than an exact, economic calculations
c) Only selected costs, profits or saving of the investment before payback are
included considering their difference in timing
d) Being an approximate calculation payback period may or may not selectthe
correct alternative
Answer: (C)
3. Calculation of Internal Rate of Return BUT 2014]

a) Takes into account third party Return
b) Ignores negative cash flows
c) is not applicable to PSUs
d) Discovered that rate of discount which makes the present worth of positive
each flows and non cash benefits equal to the present worth of negative cash
flows and non cash costs.
Answer: (d)
4. The present worth of an. alternative is 0. What do we know about the value of the
future worth? [MODEL QUESTION]
a) FW< 0
b) FW 0D
c) FW> 0
d) Cannot be determined without cash flows
Answer: (b)
rate is
5. For discounted cash flow methods, a discount rate is used. The
[MODEL QUESTION]
a) Fixed arbitrarily
b) Equivalent to bank rate
c) Equivalent to the firm's average cost of capital
d) Equivalent to the final rate of dividend
Answer: (c)
ECEN-37
POPULAR PUBLICATIONs.
6theThe seientific
following
technique
except-
of evaluation of capital expenditure decisions include
[MODEL QUESTIONI
a) net present value
b) profitability index
c) internal rate of return
d) payback period
Answer: (d)
SHortAnswaTpeguestions
1. A company wants to set up a reserve which will help it to have an annual
equivalent to Rs. .1,00,000 for every year for the next 2Oyears amount
employees welfare measure. Find the single payment that
towards its
has to be made now.
[Given i= 15%].
Answer: [MODEL QUESTION
The company sets up a reserve which will result in a annuity of
20 years. The single payment Rs. 1,00,000 per year fo
to be made at present should be equal to the present worth
of Rs. 1,00,000 per annum for 20 years
which can be calculated as follows:
Amount of single payment
=1, 00, 000xPVIFA1s%,20yr)
1,00, 000x 6.259= |6,25,900 Rs.
2. What is life cycle cost"
Answer: [MODEL QUESTION)
In economic engineering
analysis the assets are compared
phases, reaching maturity andwith the life of human being
like growing through various
as the life cycle. The total ultimately declining term
costbf
referred to as "cradle to grave" or ownership over the life of an asset, also commo
for maintenance. Similarly every "womb to tomb'". At every stages cost are asso ated
phases in life cycle and each phase product and services produced
acquiring, using,
incurs various costs. It inéludes also moves u wi h
caring, feasibility cost associateu
maintenance, replacement and disposal, study, design and development,
development, production.
support, training and operation. , PTofiure
depicts the various phases The below "5
and cost associated.
Need
DIFFERENTLIFE CYCLE STAGES
Product Manufacturing
Production / /Operational
Assessment Designn / Decline and
Research andd Stage use. End stage
Development sales
Cost associated |Initial
Maintenance &
with and |ActualI Service
All cost
requirement
|design production incurred |All cost to
to operate and end the
analysis and constructions maintain project /
research cost afer design
product
|being sanctioned.| and
COST ASSOCIATED WITH VARIOUS dispose oft.
ACTIITES AT EACH STAG
ECEN-38
-Planning cost -Detailed -Resource -Use by end -Manage the

-Feasibility design allocation user. product for
study cost |-Production Procurement -Train personnel| its
|- Product allocations and acquiring -Maintenance anticipated
design -Production stage and support. life
process planning -Building new -Inventory -Proper
support support. disposal
facilities.
LCC Acquisition costs +operating costs + scheduled maintenance
unscheduled maintenance + Conversion/ decommission
3. Write short note on Debt repayment. [MODEL QUESTION]

Answer:
Debt repayment can be also called loan amortization. Although the manner in which the
debt is repaid, i.e., repayment schedule depends on the terms of agreement between
lender and debtor but generally there are two common methods of loan répayment (1)
-
periodic payment which normally includes interest in a lump sum. Most loans are repaid
is equal periodic installments which can be normally, quarterly or annually covering
interest as well as principal known as amortized. The amount of each installment of
repayment of amortized loan can be calculated as -
Loan amnount
PVIFA (no. of years of maturity, interest rate)
4. For the following cash for situation shown in Table 3.4, draw the cash flow
diagram and solve for Passuming a 12% interest rate, [MODEL QUESTION]
Year Cash Flow (L.E)
-400
-600
Answer:
13 4
400 0 -600
+P
PV of 600
- PV of zero
-PV of 400
-PV of zero
PV of zero
Compared
with PV (+P)
Cash Flow Diagram
ECEN-39
P= 600xPVIF(12%,5y)+400xPVIF (12%,3y)
= (600x0.567) +(400x0.712) = 340.20+284.80 = 625 Rs.
5. An aqueduct is needed to bring water into the city. It can be built at a reduced
size now for Rs. 3 lakhs and enlarged 25 years later at Rs. 3.5 lakhs. The other
option is to construct the full size aqueduct for Rs. 4 lakhs. Use Present Worth
find the better choice. [Given i= 6%] [MODEL QUESTION
Answer:
Option 1: Build at reduced size now and enlarged later
PW=3,00,000xPVIF 0y+3, +3,50,000xPVIFex2sy)
=(3,00,000x1)+(3,50,000x 0.233)
=3,00,000+81,550 3,81,550
Option 2: Construct full size adequate now-

PW = 4,00,000x PVII"%o)
4,00,000xl= 4,00,000Rs.
Since present worth of I" option results in lower amount/cost, therefore the option to
built at reduced size now and thereafter enlarge after 25 years should be followed.
6. Find the Equal Annual Worth (EAW) [MODEL QUESTION

Initlal Cost Rs. 40,000
alvage Value = Rs. 5,000
Revenuelyear = Rs. 10, 000
Life 10 years
i 15%
Answer:
40,000 5,000
EAW =10,000.
PVIFA0y, 196) FVIFA1oy, 15%)
000 5,000
=0, 000-40,
5.019 20.304
= 10,000-7970+246
2,276, Rs.
Cong Answer Typei9uestions

1. Write short note on Risk vs. Return WBUT 20151
Answer: will
Risk: Risk can be defined as the chance that the actual outcome from an investment can
differ from the expected outcome. So more the variability of possible outcomes tha
occur, will results in greater risk involvement.
ECEN-40
Return: Return is the motivating factor that motivates the investor: in the form of
rewards, for undertaking the investment. Investors are taking all the efforts of investment
to maximise their expected retum from investment.
The retums from an investment cannot be thought of in isolation of the risk factor. Retum
and risk go together in investment. As the future is uncertain, there is always å
probability that the retuis will be either better or worse than predicted. The larger the
variation in returns, the greater the presence of the risk factor. Every thing an investor
does is linked directly or indirectly to return and risk.
The width of a probability distribution of rates of return is a measure of risk. The wider
the probability distribution, the greater is the risk. The rate of return is the total return that
the investor receives during the holding period, expressed as a percentage of the purchase
price of the investment at the beginning of the holding period
2. Discuss in detail the concept of Sensitivity Analysis. [MODEL QUESTIONI

Answer:
Sensitivity analysis, also called "what if" analysis, analyses and explores what would
happen to the viability of the project when some variable like sales or investment deviates
from its expected value. Sensitivity analysis varies only one variable ata time, eg.
to
study the effect of an adverse variation in sales, the values of the other underlying
variables are maintained at their expected levels.
Merits of sensitivity analysis

or
1.It is a very popular method of assessing risk because it shows how robust
vulnerable a project is to changes in values of underlying variables.
2. It indicates whether further work is necessary because if NPV is highly sensitive to
changes in some factor, it may be worthwhile to explore how the variability of the
critical factor may be reduced.
3. It is intuitively very appealing because if articulates the concerns the project
evaluators normally have.
Demerits ofsensitivity analysis

does not provide any idea of the probability of the change in the
variable - only
.t
shows what happens to NPV if there is a change in that variable.
2. In the real world many variables change together whereas in sensitivity
analysis only
one variable is changed at a time.
. The results of sensitivity analysis may be interpreted by different
decision-makers
differently-one may accept the project-another may rject.
i=12%]|IMODEL QUESTIONI
3. Find
the better choice by using Future Worth [Given
Machine Initial Cost Return/Year Life
A 40 Lakhs 8 Lakhs 4 Yearss
10 LakhsS 4 Years
B 45Lakhs
Answer:
Calculation of Future Worth of machine A
ECEN-41
FW ofinitial cost = 40,00,000x FVIF(2% 4y)

40,00,000x 1.574 (62,96,000)
FW of initial cost= 40,00,000 x FVIFA(2%, 4y)
40,00,000 x 1.574 (62,96,000)
NFW of machine A =(24,72,000)
Calculation of FW of machine B
FW ofinitial cost= 45,00,000x FVIF(129%,4y)
45,00,000 x 1.574 = (70,83,000)
FW of initial cost= 10,00,000x FVIFA12%,4y)
= 10,00,000 x 4.779
(47,79.000)
NFW of machine A (23,04,000)
Here, the Net future worth of both the machines are negative so that investment in both
would result in losses so that none should be invested but one of them has to be chosen
if
then machine B is better because its net future worth is less than that of machine A
N.B. To solve the above problem, we have assumed that returns per year are given in
terms of cash inflows.
4. a) What is NPV? What are its limitations? What are the differences between NPV
and IRR?
b) What are the two ways of defining benefit-cost ratio?
cThe expected cash flows of a project are as follows:
Year Cash flow
100,000
20,000
30,000
3 40,000
50,000
5 30,000
The cost of capital is 12%. Calculate the following:
i) Net present value
ii) benefit-cost ratio
ii) Internal rate of return. [MODEL QUESTIONI
Answer:
a) 1 Part
Net Present Value (NPV) Method
In this method all cash flows attributable to a capital investment projects are discounted
by a chosen percentage e.g. the firms weighted average cost of capital to obtain the
present value of the future cash flows. If the present value of the future cash flows 5
higher than the present value ofthe investments the proposal is accepted else rejected.
order to arrive at the net present value the present value of the future cash flows
NPV-
.
deducted from the initial investment.
C C
1+K) (+K)* (1+Ky"*(+K
ie, NPV = CRY C
i(1+K
ECEN-42
ECONOMICS FORENGINEERS
where C, = initial investment (cash out flows)
C,= cash inflows occurring at time

K Discount rate.
2n part:
Limitations of NPV Method
It is difficult to calculate as well as to understand.
Calculating the discount rate is complicated.
This method is an absolute measure. When two projects are considered this
method will favour the project with the higher NPV.
If two projects with different life spans are evaluated using this method, this
method may not yield satisfactory result.
3 part:
Difference between NPV and IRR
. Under the net present value method the cash flows are converted into present values
by using discount rates which is usually taken to be the firm's cost of capital. Under
the IRR method no such discount rate is given and it is to be selected such that the
PV of capital outlay exactly equals the PV of net cash flows.
2. NPV tries to maximize the benefit from the project in terms of PV which is in line
with the corporate objective, i.e. maximization of value of firm whereas IRR denotes
the interest rate at which the investment in the original cost of the asset is recovered
during the life span of the asset.
3. NPV is based on more logical assumption to reinvestment than of IRR whose
principal shortcoming is the assumption that the firm has opportunity to reinvest a
project's relcased funds at IRR, whereas NPV assumes that the opportunity to
reinvest at cost of capital.
b) A benefit-cost ratio (BCR) is an indicator; used in the formal discipline of cost-

benefit analysis, which attempts to summarize the overall yalue for money of a project or
proposal. A BCR is the ratio of the benefits of a project or proposal, expressed in
monetary terms, relative to its costs, also expressed in monetary terms. All benefits and
costs should be expressed in discounted present values.
Benefit cost ratio (BCR) takes into account the amount of monetary gain realized by
performing a project versus the amount it costs to execute the project. The higher the
BCR the better would be the investment. General rule of thumb is that if the benefit is
higher than the cost the project is a good investment.
The two ways of defining benefit-cost-ratio are
1) NPV which determines the net benefit i.e., Benefit minus cost of project in absolute
term because
Net Present Value = Present value of cash inflows- Present value of cash outflows
ECEN-43
2) Profitability index which determines the net benefit from the project in relative tem
terms of a ratio, i.e., PI measures the benefit per rupees of investment in the proje
value of cash inflows
and given by PI=- Present
Present value of cash outflowS
c)
(1) (2) (3) (4) (2)*(3)
Year Cash Flow PVIF@12% PV of cash flow
00 (1,00,000)) 1.000 (1,00,000)
01 20,000 0.893 17,860
02 30,000 0.797 23,910
03 40,000 0.712 28,480
04 50,000 0.636 31,800
05 30,000 0.567 17,010
0 Net Present Value (19,060
(11) Benefit-cost =.
PV of cash inflows
ratio
PV ofcashoutflows
1,19,060=1.20(approx.)
. 1,00,000
(iii) Calculation of NPv@14%
- (20,000x0.877)+ (30,000x0.769)+ (40,000x0.675)
+(50,000x 0.592)+(30,000x0.519)-1,00,000
= 17,540 +23,070+27,000+29, 600+15,570-1,00,000
=12,780
Calculation of NPV@16%
- (20,000x0.862)+(30,000x 0.743)+(40,000x0.641)
+(50,000x0.552) + (30,000x0476)-1,00, 000
= 17,240+ 22,290+25,640 +27,600+14,280-1,00,000
1,07,050-1,00,000 7,050
= =
Calculation of NPV @20%
= (20,000x0.833) + (30,000x 0.694) + (40,000x0.579)
+(50,000x0.482)+(30,000x0.402)-1,00,00
= 16,660+ 20,820+23,160+24,100+12,060-1,00, 000
= (-)3, 200
ECEN-44
Discount rate NPV
16% (+) 7,050

I RR
20% H3,200 0
Therefore, applying interpolation, we get,

IRR-16 0-7,050
20-16 -3,200-7,050
IRR-16-7,0500.688
= 0.688
4 -10,250
IRR-16=2.751
IRR =18.751%{approx.)
ECEN-45
POPULARPUBLIGATIONS
FINANCIAL ACCOUNTING AND TAXESs

Multlplo.Cholce Typeguestions
1. Totest the liquidity of a firm of the following ratio is useful? WBUT 2014
a) Acid Test Ratio b) Capital Turnover Ratio
c) Bad debt - sales Ratió d) Inventory Turnover Ratio
Answer: (a)
2. Which of the following item is not black hole business expenditures in taxation
of income: WBUT 2014]
a) feasibility studies b) market research expenses
c) capital assets expenditures d) contribution to regional expenditures
Answer: (c)
3. Prime cost includes WBUT 2014]

a)Direct material b) Direct labour
c) Chargeable expenses d) All of these
Answer: (d)
4. Which one is the right accounting equation?

a) Assets - Liabilities = Capital WBUT 2015
b) Assets + Liabilities =
Capital
.c) Assets+Capital = Liabilities
d) None of these
Answer: (a)
5. Which one is the right Accounting

a)Assets Liabilities = Capital
-
Equation? [MODEL QUESTION
b) Assets+ Liabilities = Capital
c) Assets+ Capital = Liabilities
d) none of these
Answer: (a)
6. Balance Sheet is
prepared
a) to check the accuracy [MODEL QUESTIONI
b) to' know the financial of books
position
c) to know the net profit or
d) to find out the value of loss
Answer: (b) assets
7. Liquid ratio comprises

a) CA to CL [MODEL QUESTIONI
b) CA-Stock to CL Bank
c) CA to Llquld Llabllitlos overdraft
ECEN-46
d) None of these
Answer: (b6)
. The ideal standard of Current Ratio is [MODEL QUESTION]

a) 1:1 b) 2:1
c) 1:2 d) none of these
Answer: (6)
Short Answer Type Questions

1. What is Ratio analysis? Discuss briefiy any three ratios (including their
formulae). [MODEL QUESTION]
Answer:
A ratio is an arithmetical relationship between two figures. Financial ratio analysis is a
study of ratios between various items or groups of items in financial statements. Financial
ratios can be classified into five broad categories (1) Liquidity ratios, (2) Leverage
ratios, (3) Turnover ratios, (4) Profitability ratios, and (5) Valuation ratios.
Liquidity ratios measüre the capacity of a firm to meet its short term obligations.
Leverage ratios signify the ability of the concern to meet long-term obligations. Turnover
ratios measure how efficiently assets are employed by a firm. Profitability ratios signify
the profit-earning capacity of business whereas valuation ratios indicate how the equity-
stock of the company is assessed in the capital market. Some important ratios are
=current assets be ideally 2:1 higher than which indicates
a) Current ratio should
current liabilities
existence of idle funds and lesser than which indicates danger of hampering of normal
day-to-day operations.
Cost of goods sold high ratio indicátes expansion of

b) Inventory turnover=
Average inventory
business with dangers of overtrading and stock-out whereas low ratio indicates
accumulation of slow-moving, non-moving or obsolete stock resulting from inefficient
inventory management.
Profit before interest and tax

c Return on capital employed =
Capital employed
It signified overall efficiency of concern.
[MODEL QUESTION]
2. Discuss the advantages of ratio analysis.
Answer:
Advantages of ratio analysis are as follows:
a. Useful in financial position analysis: Accounting ratios reveal the
financial position
other financial
of the concern. This helps the banks, insurance companies and
institutions in lending and making investment decisions.
ECEN-47
POPULARPUBLICATIONS
D. Useful in simplifying accounting figures: Accounting ratios simplify, summarie

more understanda
and systematize the accounting figures in order to make them
and in lucid form. They highlight the inter relationship which exists
between va
statements. ious
segments of the business as expressed by accounting Often the fi
Often thefig
rela
standing alone cannot help them convey any meanin8 and ratios help them to
with other figures.
C. Uscful in assessing the operational eficieney: ACcounting ratios help to have
becomes evidan
Idea of the working of a concern. The efficiency of the fim
heale
analysis is based on accounting ratios. They diagnose the financial
o
evaluating liquidity, solvency, profitability etc. This helps the management to
Tinancial requirements and the capabilities of various business units.
d. Useful to forecasting purposes: If accounting rattos are calculated for a number of
years, then a trend is established. This trend heips in setting up future plans and
forecasting. For example, expenses as a percentage of sales can be easily forecasted
on the basis of sales and expenses of the past years.
c. Useful to locating the weak spots of the busines8 Accounting ratios are of great
assistance in locating the weak spots in the business even though the overall
performance may be efficient. Weakness in financial structure due to incorrect
policies in the past or present revealed through accounting ratios.
EonEAnsweTPeBuestons
1. a) From the balances given below prepare an income Statement for the yea
ended on 31st December 2009. WBUT 2014]
Rs. Rs.
Opening Stock 94, 420 Sales Return 13, 400
Purchases 1,06, 400{Closing stock 1,92,100
Drawing 12,000 Purchase Return 1,000
Wages 3,660 Sales 2,36,400
Carriage Inward 14,260 Salaries 8,000
Discount Received 5,000Travelling& Conveyance 700
Telephone Expenses 1070 Commission Received 5,000
Carriage Qutwards 500 Salary Paid 3,000
Electricity Paid 5,290 Bad Debts 200
Rent Received 11,000 Rent Paid 2,960
Answer:
Trading & Profit & Loss Account
for the year ended on 31.12.0
Dr.
Cr.
Rs. Rs Rs. Rs.
To opening stock 94,420 By sales
1,06,400 1,05,400 Less: 2,36,400
To purchase return
Less: return 1,000 By closing stock
13,400 2,23,000
To wages 1,92,100
3,660
ECEN-48
To carriage 14,260
inward
To gross profit 1,97,360
(b/) '
4,15,100 4,15,100
To telephone 1,070 By gross profit 1,97,360
Cxpenses
To carriage 500 By salaries 8,000
outwards
To electricity 5,290 By discount 5,000
reccived
To salaries 3,000 By rent reccived 11,000
To travelling & 700 By commission 5,000
convenience reccived
To bad debts 200
To rent 2,960
To net profit 2,12,640
2,26,360 2,26,360
b) Write a detailed note on equity capital and debt capltal. WBUT 2014]
Answer:
Equity capital is that invested money that, in contrast to debt capilal, is not repaid to the
investors in the normal course of busincss. It represents the risk capital staked by the
Owners through purchase of a company's common stock (ordinary
shares).
The value of cquity capital is computed by estimating the current market valuc of
everything owned by the company from which thc.tolal of all liabilitics subtracted. On
is
the balance-sheet of the company, cquity capital is listed as stockholders' equity or

owners cquity. It also called equity financing or share capital
a loan. It is a loan made to

Debt capital is the capital that a business raiscs by taking out
a company that is normally repaid at some futurc
date. Dcbt capital differs from equity or
part ownors of the
share capital because subscribers to debt capital do not become
decbt capital usually reccive a
business, but are merely creditors, and the suppliers of
is known as the
contractually fixed annual percentage rcturn on their loan, and this
coupon rate:
repayment of annual returns. This
Debt capital ranks higher than equity capital for the
in full before any dividends
means that legally, the interest on debt capital must be repaid
are paid to any suppliers of cquity.
high debt-to-cquity capital ratio.
A company that is highly geared has a
2. Following in the Trialbalance of Deep Ltd for the year ended 31St December
2011. Prepare Final accounts.
ECEN-49
Trial balance for the year ended 31/12/2011

Debit balance Amount | Credit Balance Amount
Bank Balance 800 Bills Payable 7000
Opening Stock 20000 Bank Loan
. 10400
Debtors 40000 Share Capital 75000
Purchase 100000 Sales 166000
Motor Car 15000 Commission Received 300
Furniture 20000 Purchase Return 2000
Provision of
Machinery 15000 Discount on Debtors 700
Discount Allowed 400 Provision for Doubtful Debt 1200
Carriage Inward 500 Discount Received 800
Wages 10000 Creditors 12000
Trade Expenses 5000 Debentures 7000
Manufacturing
Expenses 15000 General Reserve 3500
Salaries 14000
Advertisement 14000
Income Tax 8200
Insurance Premium 1400
Return Inward 5000
Bad Debts 700
Carriage Outward 400
2859000 285900
Additional information:
1. Closing stock Rs. 40000
- 10 %
2 Depreciation on Motor-15%, Machinery 5 % & furniture
3. Bad debt written off 1000
4. Prepaid Wages Rs. 1000
5 Provision for discount on debtors 2 %
6. Outstanding Salary expenses is of Rs. 1500
7. Maintain provision on Bad & doubtful debt5% [MODEL QUESTION]
Answer:
Trading Account for the year ended 31/12/2011
Dr. Cr.
Particulars AmountParticulars |Amount
To apening stock 20000 By sales 166000
"Purchaše 100000 |less return inward 5000 161000
less: Purchasereturn 200098000
Carriage inward 500 "
Closing stock 40000
Manufacturing exps. 15000
"Wages 10000
Less prepaid wages 10009000
"
Gross profit 58500
201000 201000
ECEN-50
ECONOMICSPORENGINEERS
Trading Account for the year ended 31/12/2011

Particulars Amount Particulars Amount
To Trade Expenses 5000 By Gross Profit 58500
Salary 14000
add:Outstanding Salary 150015500 Commissionreceived |300
Advertisement exps 14000 Discount reccived 800
Insurance prcmium 1400
Carriage Outward 900
To Depreciation
Motor Car 2250
Furniturc 2000
Machineryy 750 5000
To Discount allowcd 400
To Prov for Bad decbt 1700
700+ 1000]
Add: New prov 1950
3650
less: old Prov 120012450
To disc. on debtors
New 741
|Less old
700 41
"Net profit (before tax) 14909
59600 59600
"
Income tax 8200 Net profit ( before tax)|14909
net profit [trf to balance Sheet] 6709
14909 14909
Balance Sheet as on 31/12/20111

Liabilities_ Amount Assets Amount
Share Capital Fixed Asset
Equity Capital 75000 Motor Car 15000
Less: depreciation (15%). 2250 12750
R&S
General reserve 3500 Furniture 20000
Profit& loss 6709 Less: depreciation (10%) 2000 18000
Secured Loan Machinery 15000|

Debenture 7000 Less depreciation (15%) 750 14250
Bank loan 10400 Investment
Current Liabilities
&provisions
|Creditorss 12000 |Current assets, Loans and advances
Bills payable 7000 | Closing stock |40000
Outstanding salary 1500 Debtors 40000|
Less: Bad debt 1000
ECEN-31
POPULARPUBLICAIONS
39000
Less prov. for Bad debt [5% ] 1950
37050
Less discount on debtors [2%] 741 36309
Prepaid Wages 1000
Miscellaneous Expenditure
123109 123109
3. Write short note on Balance Sheet. [MODEL QUESTIONI

Answer:
Balance sheet which is also known as position statement is part of final accounts, ie
final summary of the entire accounting Svstem, along with the income statement or prot
and loss account. The balance sheet of a firm displays the net asset position of te
concern at the end date of the accounting period depicting, as far as possible, the financ
position or financial state of affairs of the concern on the accounts closure date.
The Balance Sheet of an Indian company must be prepared following the pat I o
schedule VI of the Indian companies Act, 1956 either in horizontal fornm or in veria
form preferably. The presentation represents on one side, the sources from which
funds of the firm have been obtained, i.e., capital and liabilities and, on the other side,te
way's in which such funds have been used, i.e., Assets.
Balance Sheet is a very important tool of financial statement to the both internal user ie
emal management and external users, i.e., creditors, investors and shareholien
lenders etc. but it is a static statement and fails to exhibit the curent values and s
affected but accounting policies such as stock-valuation, depreciation of assets etc.
ECEN-52
INFLATION
Mlflple Cholce pc Cueston
1. A real value can be derived from a nominal value by WBUT 2015]
a) adjusting for changes over timee
b) adjusting for date collection errors
c) adjusting for population changes
d) adjusting for changes in prices
Answer: (d)
[MODELQUESTION]
2. Inflation makes
a) Future rupees less valuable than present rupees
b) Future rupees more valuable than present rupees
c) Future rupees equal to present rupeess
d) None of these
Answer: (a)
3. Which one of the following is helpful for measuring inflation?
curve [MODEL QUESTIONJ1
) Learning
b) Segmentation model
c) Consumer price index
d) MARR (Minimum attractive rate of return)
Answer: ()
4. If the inflation rate is 6% per year and the market interest

rate is known to be
economy?
15% per year. What is the implied real interest rate in this inflationary
[MODELQUESTION]
a) 11.45% b) 9.00%
c) 8.49% d) 8%
Answer: (b)
Sio Aswer Type Cuestions

it is Rs. 188 today.
1. Labour.cost index value was at Rs. 124 ten years ago and years ago. Estimate
Annual labour costs for similar capacity were Rs. 675500 the
WBUT 2014]
the present annual labour cost.
Answer:
By applying the cost-index model, we get,
current time-point
Cost at current time-point Index value at
Cost at past time-point Index value at past time-point
Present annual labour cost 188

6,75,500 124
188
Rs.
Present annual labour cost= 6,75,500 x=10,24,145
124
ECEN-53
POPULARPUBLICATIONS
2. Discuss the concept of demand pull inflation. MODEL QUESTION

Answer:
Prices in any market are determined by the equation of demand and supnlu Th
equilibrium price would be disturbed if either of these factors changes in relation to
other. An increase in demand withthe supply remaining same or a reduced supply for t
same demand level will cause the prices to increase. Demand-pull inflation refers th
situation where the aggregate demand for goods and services exceeds the avaiak
supply of the output and this causes the general rise in price level of the economy. Thi
normally is the case when the pressure of demand is súch that it cannot be met by th
available supply, which has attained its saturation, and thus cannot be stepped up anv
further.
3. What is cost push inflation? How does it take place? [MODEL QUESTION
Answer
Cost push inflation is a type of inflation where prices rise due to the increasing thecost o
production of producers and also due to the increase in the profit motive of the produces
the aggregate demand remaining almost constant.
Prices may rise even when there is no increase in aggregate demand. This could hold te
if the cost ofgoods and services increase. Whenever due to any reason, the price of a
one or more factors of production increases; the resultant cost of goods and services w
rise. The producers pass on this rise in cost to the consumers by increasing the price of
their goods and services. Such rise in the general price level is known as cost-pusi
inflation. A rise in the price of products due to the increase in petroleum prices is
case of cost-push inflation.
t
Lon Answdype.guestions
1 Free market mechanism and inflationary price rise result in a benefician grow
rate and employment. Do you agree? Give reasons for your answer. WBUT 2014
Answer:
Free market economy along with inflation is not beneficial but
destructive for growtha
employment for the following reasons.
Effect of inflation on the distribution of income and wealth

The effects of inflation on various groups society
of can be described as follows:
Debtors and Creditors: Debtors are benefited by inflation value
v
as it causes a fall in the
ofmoney they must repay in the future. The price level increases at a higher rate than
interest rates. Creditors, however, are at than the
a disadvantage as they receive less tna"
amount in real terms.
Producers: Inflation benefits producers
as the rise in the price level is, in most
more than the rise in costs.
ECEN-54
ECONOMICSPOR ENGINEERS
Investors: The cffects of inflation on investors arc based on two factors the investor's
investment in equity, and his investment in fixed income securities. Equity investmcnts
generally rise in value during inflation, benefiting investors because of the increase in
equity prices. Investments in fixed income securities results in loss to investors in real
terms as the real income from the investment falls.
Effect of inflation on production

Mild inflation encourages firms to invest morc and increase the production capacity unti
full employment is reached. But if inflation inereases further or reaches hyporinflation,
production and employment generation are adverscly affected.
Hyperinflation adversely affects the level of production due to the following reasons:
Savings come down due to the decrease in purchasing power, which finally lcads to a
fall in the capital investments.
Maintaining large stocks during inflation reduces supply and results in the black
marketing
Inflation brings a shift from the production of normal consumer goods to luxury
In conclusion it can be said that inflation is like one-cyed deer because in frec market
economy it results in inequitable transfer of wealth from lower income people to higher
income people reducing the rate of growth and development although on employment
initially it can have a positive effect but ultimately when the growth ratc slows down,
then it invariably creates unemployment problems.
2. a) Discuss about the creepirng inflation, walking inflation, galloping inflation and
running inflation.
b) Explain
i) Open and repressed inflation
Comprehensive and sporadic inflation
c) Define inflationary gap. WBUT 2015]
Answer:
it is referred asCreeping Inflation.
a) Creeping Inflation: When prices are gently rising,
It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation.
Up to) 3% per annum
According to R.P. K.ent, when prices rise by not more than (i.e.
(year), it is called Creeping Inflation.
Creeping Inflation, it
Walking Inflation: When the rate of.rising prices is more than the
is known as Walking Inflation. Trotting Inflation is its another name. When
prices rise by
10% per annum), it is
more than 3%, but less than 10% per annum (i.e., bctween 3%, and
we must take Walking
called as Walking Inflation. According to some economists,
Inflation seriously as it gives a cautionary signal for the occurrence of'
Running inflation.
Furthermore, if, not checked in duc time, it can eventually result in Galloping Inflation.
Galloping Inflation: According to Prof. Samuclson, if prices rise by dual or triple digit
inflation rates like 30% or 400% or 999% ycarly, then the situation can be termed as
Galloping Inflation. When prices rise by more than 20%, but less than 1000% per annum
ECEN-55
i.c., between 20% to 1000% per annum), Galloping Inflation occurs. JumpingInlia Infa
is its another name. India has been witnessing it from second five-year plan period.
Running Inflation: A rapid acceleration in the rate of rising prices is called Runn
Inflation. It occurs when prices rise by more than 10% in a year. Though economists h
not suggested a fixed range for measuring running inflation, we may consider a
increase between 10% to 20% per annum (double-digit inflation rate) as a Runni
Inflation.
(b) () Open Inflation: When government does, not attempt to restrict inflation, i
known as an Open Inflation. In a free-market economy, where prices are allowed to t
its course, Open Inflation occurs.
Repressed Inflation: When government prevents the price rise through price contr
rationing, etc., it is known as Suppressed Inflation. Repressed Inflation is its anot
name. However, when government removes its controls, it becomes Open Inflationl
then leads to corruption, black marketing, artificial scarcity,
i) Comprehensive Inflation: When the prices of all commodities rise in the ent
economy, it is known as Comprehensive Inflation. Economy-Wide Inflation is its anote
name.
Sporadic Inflation: Time when prices of only a few commodities in some reg
(areas) rise, it is called Sporadic Inflation. It is sectional in nature. For example, incres
in food prices due to bad monsoon (winds that bring seasonal rains in India).
c) An inflationary gap, in economics, is the amount by which the actual gross domes
product exceeds potential full-employment GDP. It is one type of output gap, the o
being a recessionary gap:
The inflationary gap is always an ex-ante phenomenon, it is always expected to ocuti
the future. It arises when expected expenditure will not equal expected consumption
future date. Keynes defines it as the excess demand in the market for cönsumptiad
goods and services. He defined an inflationary gap as an excess of planned expenc
over the available output at pre-inflation or base prices. Given a constant av
propensity to save, rising: money incomes at full employment level would leao
excess of demand over supply and to a consequent inflationary gap. Thus Keynes
the concept of the inflationary gap to show the main determinants that caus
inflationary rise of prices.
When an initial increase in aggregate demand produces inflation (so called deman
inflation) and real GDP increase, the price level and real
GDP are determined atunpoint
where the new aggregate demand and the short-run aggregate
supply meet. 1nis p
known as above full-employment equilibrium, Uppl
since the short-run aggregate
above the long-tem aggregate supply, i.c. above
the aggregate suppiy
employment. The gap created between real GDP and
potential GDP is the conseg
inflation, this is one of the reasons this type
of gap is called an inflationary gap.
Obviously, this situation cannot last forever, because
.
there is a shprtage of latou&ereg
shortage of labour produces the risc of wage rates, which
makes the short-run ags
ECEN-56
supply decrease, until it reaches the full-employment level. The short-run aggregate
supply decrease makes an upward pressure on the price level, consequently causing
inflation. The once created gap between real GDP and potential GDP was the sign ot
forthcoming inflation, this is another reason this type gap is called an inflationary gap
The main cause of the gap is considered to be expansionary monetary policies carried out
by the government. An inflationary gap is a signal that the economy is in the boom part
of the trade cycle, resources are being used over their capacity, factories are operating
with increasing average costs; wage rates increase because labour is used beyond normal
hours at overtime pay ratesA case of the gap can arise when consumer or investor
spending is very buoyant, when foreign demand is increasing or when government
expenditure increases.
3. A manufacturing unit engages an economist for future appraisal for estimating

the viability of the project order recently received. The economist gathered
following information for such estimations. The data includes the major material
used along with their historical data regarding the price. He also determined the
cost of living index to incorporate the inflation factor. Following are the date
extracted
Study on 20 years historical cost data for the raw material reveis:
MaterialX= increased by 6.5 % per year
Material Y = increased by 7 % per year
MaterialZ= increased by 9 % per year
Present cost for the materials would be
MaterialX== Rs. 35,000
MaterialY Rs. 20, 000
Materialz= Rs. 25,000 10 years. Determine the
If the rate of return expected is 30 % and the project life of
[MODEL QUESTION]
present worth cost of production.
Answer:
Present Worth Analysis of the Project- Impact of Inflation Rates_
Material X Material Y |Material Z TotalPVEPreseat
|
lInlation
Year Cost
Year ntlation lAdjustedCost Inflation |Adjustedco|Cost rate Adjusted cost (30%Worth
Cost rate
Cost ate |Cost
I(1.09)^n
Cost
1.065 )^n l1.07)*n
2000020000 25000
35000 35000 20000 25000 80000| 180000
20000 1.0700 21400 25000 1.09 27250 85925 0.769 66096
35000 1.065 37275 1.1 29703 92298 0.592L 54614
1.1342 39698 20000 1.1449 22898 25000 881|
35000 24501 25000 1.2950| 32376 99155 0.455 45132
35000 1.2079 42278 20000 1.2250|
1.3108 26216 25000 1.4116 35290|106532 0.350 37300
5 35000| 1.2865 45026 20000 28051 25000 15386 38466114470 0.269 30830
6 35000 1.3701| 47953 20000| 1.4026 25000 41928 123012 0.207 25485
14591| S1070 20000 1.5007 30015 1.6771|
35000 45701 132206 0.159L 21069
1.5540| 54390 20000| 1.6058 32116 25000| 1.8280|
35000 1.7182 34364 25000 1.9926 49814 142103 0.123 L 17420
9 35000| 1.6550 57925 20000|
1.8385 36769 25000 2.1719 54297|152756| 0.094 14405
10 35000| 1.7626 61690 20000 Total 953714
So the total present worth ofthe project will be Rs.9, 53,714/
ECEN-57
4. A company has received quotes for its recent 2dvertisement for the purchase
a sophisticated milling machine. The data are as per the estimate in today's nin
rupee
value.
MachineX_Machine Y
Purchase price (Rs.)_ 15,00,000| 20,00,000

Machine life (years 7-
2,00,000
Salvage value at the end of machine life (Rs. 3,00,000
Annual operatingand maintenance cost (Rs.) 3,00,000 2,50,000 1
Assuming an average annual inflation of 5% for the next seven years, determine
the best machine based on the present worth method. Interest rate is 15%
compounded annually. [MODEL QUESTION]
Answer:
Average annual inflation rate = 5%
Interest rate = 15% compounded annually
Machine X
Purchase price = Rs. 15,00,000
Machine life = 7 years
Salvage value at the end of machine life = Rs. 2,00,000
Annual operating and maintenance cost Rs. 3,00,000
The computation of the present worth of the annual operating and maintenance costs of
the machine X is summarized in Table 1.
Table-1: Computation of Present Worth of the annual Operating and Maintenance Coss
ofEndMachineX
Annual Inflation factorInflated annual PIF, 5%, n Present worth of
of operating & (FIP, 5%, n) operating & inflated annual
year maintenance maintenance cost operating &
(n) cost (Rs.) (Rs.) maintenance cost
B D F (Rs.)
BxC DxE
3,00,000 1.050 3,15,000 0.8696 2,73,924
3,00,000 1.102 3,30,600 0.7561 2,49,967
3,00,000 1.158 3,47,400 0.6575 2,28,416
3,00,000 1.216 3,64,800 0.5718 2,08,593
5 3,00,000 1.276 3,82,800 0.4972 1,90,328
6 3,00,000 1.340 4,02,000 0.4323 1,73,785
3,00,000 1.407 4,22,100 0.3759 1.58,667
14,83,680
Rs.
The equation for the present worth of the machine X is
PW15%)=Purchase price + Present worth ofinflated annual and operating co
-Present worth of the salvage value
= 15,00,000+ 14,83,680-2,00,000 x
(inflation factór) x (PIF, 15%, 7)
ECEN-58
=15,00,000+14,83,680-2,00,000 x (F/P, 15%, 7) x (PIF, 15%, 7)

=15,00,000+ 14,83,680-2,00,000 x 1.407 x 0.3759
= Rs. 28,77,901.74
Machine Y
Purchase price = Rs.. 20,00,000
Machine life = 1 years
Salvage value at the end of machine life = Rs. 3,00,000
Annual operating & maintenance cost= Rs. 2,50,000
The computation of the present worth of the annual
operating and maintenance costs of
the machine Y is summarized in Table 2.
Operating and Maintenance Costs

Table-2: Computation of Present Worth of the annual
Machine Y
of Annual Inflation factor Inflated annual PIF, 5%, n Present worth of
End
operating & inflated annual
of operating & (F/P, 5%, n)
maintenance cost operating &
year maintenance
(Rs.) maintenance cost
(n) cost (Rs.)
D E F (Rs.)
B
C DxEE
BxC 0.8696 2,28,270
2,50,000 1.0050 2,62,500
2,75,500 0.7561 2,08,306
2 2,50,000 .102
2,89,500 0.6575 1,90,346
2,50,000 1.158
3 0.5718 1,73,827
2,50,000 1.216 3,04,000
3,19,000 0.4972 1,58,607
2,50,000 1.276
0.4323 1,44,821
2,50,000 1.340 3,35,000
3,51,750 0.3759 1,32,223
2,50,000 1.407 Rs. 12,36,400
fund. It needs Rs. 50,00,000

5. A company is planning to start an employee welfare
5,00,000 every year thereafter up to the
during the first year and it increases by Rs.
terms of todays rupee value. The
end of the 5" year. The above figures are in
next five years. The interest rate is
annual average rate of inflation is 6% for the
which will provide the required
18%, compound annually. Find the single deposit
scheme after taking the inflation rate
series of fund towards employees welfare [MODEL QUESTION]
into account.
Answer:
= Rs. 50,00,000
Fund requirement during the first year
= Rs. 5,00,000
Annual increase in the fund requirement
Annual inflation rate = 6%
annually.
Interest rate = 18%, compounded
the annual fund requirements is summarized in
The computation of the present worth of
Table 3.
ECEN-59
POPULARPUOLIGATIONS
Table-3: Computation ofthe l'resent Worth

nd Annual tund
ofthe Annual Requircments
Inllatlon Inllated annual
requirenients fhctor (F7
PE, 18%, Prosent worthte
ycar fund Jnflatcd annual
(Rs.) 69%, n)
requlrements te
-) (Ra.)
requlrement
D F(Rs.)
50,00,000 I.060
BxC
53,00,00 0.8475
50,00,0000 1.124 A4,91,750
61,82,000 0.7182 44,31,912
50,00,000 191 71,46,000 0.6086 43,49,056
50,00,000 1.262 82,03,000
50,00,000 0.5158 42,31,107
1.338 93,66,000 0.4371 40,93,879
Rs. 2,16,05,704
H20,00
A obiuos
ECEN-60D
UNCERTAINTY, DEALING WITH RISK

Multple chotce Type Cuestíon
1. SImulatlon ls a model of WBUT 2014]
a) A process or system
b) An actual oxporlment on specific model that is designed to represent reality
c) An artiflclal counterpart of the functioning of selected aspects of reality
d) Galning an Insight into whether a particular process would work or not.
Answer: (d)
2.Which of the followíng is a meaningful statement of "Real options" WBUT 2014]

a) A 8et of cholces that becomes available to a business firm on account of
some business activity
b) Mean the same thing as options in financial markets
c) Involve decisions based upon some underlying assets. being traded as
financlal securities
d) Derivative instruments
Answer: (d)
3. If A and B are two independent events, then P (A and B) is WBUT 2015]

a) P(A) * P(B) b) P(A)+ P(B)
c) P(A)/P(B) d) P(A)- P(B)
Answer: (2)
two balls are drawn at
4. Abag contains 5 white balls, 6 red balls and 7 blue balls, QUESTION]
random-What is the probability that both balls are white? [MODEL
a) 1/9
b) 10/153
c) 13/18
d) 8/9
e
5/18
Answer: (6)
are drawn one at a
box contains 20 fuses of which five one defective. fuses
5. A
If'
time from the box and not replaced, what is the probability that three draws will
[MODEL QUESTION
result in three defectlve fuses?
a) 1/114
b) 113/114
c) 15/18
d) 15/9
o) 114
Answer: (a)
ECEN-61
POPULARPUBLICATIONS
Short Answer Type guestions

1. What are the advantages of simulatilon? WBUT
201
Answer:
The main advantages of simulation techniques are as follows: -
1) Simulation, being tlexible and straight-forward technique, is casier to
ply
anl..
pure analytical methods. t
cann
2) It can be used to analyse large and complex real world systems, which annot
solved by conventional quantitative technique models.
)
It is useful in solving such problems where all values of variables are not
kkno-
in advance and there is no easy way to tind these values.
4) Simulation may be the only method available when it is'difficult to obser.
actual reality.
5) Once a simulation model has been developed, it can be used over and over ao-
analyse ditferent possible situations.
6) It can be used to study the interactive effect of individual components
variables in order to detennine which ones are important.
7) Simulation is a valuable method of braking down a complicated system in
subsystems and then study each of these subsystems individually or jointlywi
others.
S) Usually data, for further analysis can be generated from a simulation model.
2. The odds in favour of an event A are 3:4. The odds against another independem
event B are 9:4. What is the probability that at least one of the events will happen
[MODEL QUESTIO
Answer: 15 sd cw.rlist euid hed oot è,ailad esirdw 2n
ot
Odds in favour of A are a:b" signifies P(A)=- a' Vihdsdorq 9t3 8i 1st-ob
a+b
"Odds in against A are a:b" signifies P(4)- b
a+b
Here, the probabilities of occurrence of 4
A and B are P(A)= and P(B) =
Also, since A and B are independent, we have P(AB) = P{A).P(B)

12
=ix-
7 13 91
The probability of occurrence of at least one of the events A.and B. is given
by,
P(4+ B) = P(4)+P(B)-P(AB)
12 39+28-12-39
91 Shei1
91
3. Five men in a company of 20 are graduates. If 3 men are picked out of the 203
random, what is tho probability that they are all graduates? What is the probabla
QUESTION
of at least one graduato? [MODEL
ECEN-62
ECONOMICS FOR ENGINEEPS
Answer:
(i) Let
A Number of graduates in the company
a Numberr of
of graduates in the sample
graraduaehe
B Number of non-graduates in the company = 20-5 15
b= Number of non-graduates in the sample

sanCCo
=-
the probability that all are graduates p,
5x4x5= 10: "C, =1; "C,

20x19x-1140,
But, 'C
1x2x3 1x2x3
P1140 114
find the
(ü) In order to find the probability of at least one graduate, 'it will be easier to
probability of the complementary event, viz. that 'none is a graduate' (i.e. all 3 are non-
is,
graduates), so that A =5, a 0, B =15, b =3. Appling the complementary probability
=
CC 1x45591
1140 228
= 91 137
Hence, by (11.6.5), the required probability is P, 1-=
228 228
iy eLong Answer Type Cuestions

1. Write short notes on any three of the following: [WBUT 2014]
a) Insurable and non-insurable risks
Answer:
insurance. The concept
Insurable risk is a risk that meets the ideal criteria for efficient
of insurable risk underlies nearly all insurance decisions.
For a risk to be insurable, several things need to be true
cover not only
The insurer must be able to charge a premium high enough to
the risk
claims expenses, but also to cover the insurer's expenses. In other words,
for the loss.
cannot be catastrophic, or so large that no insurer could hope to pay
measurable. That is, there
The nature of the loss must be definite and financially
payment is due, nor as to
should not be room for argument as to whether or not
what amount the payment should be.
The loss should be random in nature, else the insured
may engage in adverse
selection (anti-selection).
example, risks that are
Insurance is not effective for risks that are not insurable risks. For
as to make purchasing the
too large cannot be insured, or the premiums would be so high
ECEN-63
POPULARPUBLICATIONS
insurance infeasible. Also, risks that are not measurable, if insured, will be diffieu.
impossible for the insurer to quantify, and thus they cannot charge the corrcct ne
They will need to charge a conservatively high premium in order to mitigate the
risk
paying too large a claim. The premium will thus be higher than ideal, and inef
Pasing of risk involves both party to the contract. The general rule is that
otherwise agreed, risk passes with title. An agreement to the contrary mav
expressed or implied. eite
b) Use of proxy variables and interpolation in estimation projections. [WBUT 2

2014
Answer:
In statistics, a proxy or proxy variable is a variable that is not in itself directly
evar
rele..
but that sérves in place of an unobservable or immeasurable variable. In
order
variable to be a good proxy, it must have a close correlation, not necessarily linefor
positive, with the variable of interest.
Interpolation is a method of estimating an unknown price or yield of a security. Thit
achieved by using other related known values that are located in sequence with
unknown valu.
Interpolation is most often used in situations where a table of values is missing
data
an example, some bond tables list net yields for bonds in a sequence
of1, 3, and 5 yen
Interpolation would be used to determine the yield for the 2nd and 4th year. In
interpolation is a process of trial and error. efi
c) Distinguish between 'coupon rate' holding period yield' and 'yield to

maturity,
WBUT 2014
Answer:
The rate of return is the total return that the investor receives during the holding period
expressed as a percentage of the purchase price of the investment at
the beginning ofte
holding period.
Following is the general equation for calculating the rate of return:
.k=-
P-1
where,
k Rate of return
P=Price ofthe security at time t i.e. the end ofthe holding period.
P=Price of the security at time 't-1'. ie. at the beginning of the holding perioda
purchase price.
D = Income or cash flows receivable from the security at time 't.
Coupon Rate or Interest: A bond carries a specific rate of interest that is known as
coupon rate.
ECEN-64
ECONOMTCS FOR ENGINEERS
when purchasing
Yield to Maturity (YTM) is the rate of return that a bond holder expects
at its current market price and holdîng it till maturity, YTM is, basically, the
a bond
which equates
bond's internal rate of return (IRR), meaning that, it is that discount rate
and repayment of
the present value of the bond's cash flow in the form of interest
principal to its current market price.
[WBUT 2014]
d) Fiscal space
Answer: government in its
Fiscal space is a relatively new term that refers to the flexibility of a
government. Peter
spending choices, and, more generally, to the financial well-being of a
it to provide
Heller (2005) defined it "as room in a government's budget that allows
its financial
resources for a desired purpose without jeopardizing the sustainability of
are different exact definitions for the
position or the stability of the economy." There
term, and different metrics on how to measure it. The most
influential definitions of the
term come from international institutions, e.g., the International
Monetary Fund (IMF)
Nations Development
and the World Bank, the United Nations agencies, e.g., United
organizations, e.g.
Program, World Health Organization and UNICEF, and the aid
Organisation for Economic Co-operation and Development.
space' should be
The crucial point of debate is in how resources that define the 'fiscal
UN agencies
viewed and thus calculated. In particular, unlike the IMF-World Bank, the
government can mobilizo
advocates defining it in relation to the extent to which a
Development Goals.
resources to a means to combat poverty and achieve the Millennium
2. R& D section of a company has developed an electric moped. The firm is ready
for pilot production and test marketing. This will
çost of 20 million and take six
pilot production
months. Management believes that there is a 70% chance that the
and test marketing will be successful.
If successful the company can build a plant costing Rs.
200 million, the plant will
or
generate annual cash inflow of Rs. 50 million for 20 years if the demand is high
low. High demand has a
an annual cash inflow of 20 million if the demand is
capital is 12%.
probability of 0.6 and low demand has a probability of 0.4. Cost of
tree analysis.
Suggest the optimal course of action using decision [MODEL QUESTION]
t
Answer:
Working Notes: From right hand side of the decision treen
point C2. Here EMV, represents
Step 1: Computation of Expected Monetary Value at
expected NPV.
Cash in Probability Expected value of cash
flow inflows
50 0.6 30
0.4 8
20
EMV 38
inflow xPVIFA(12% 20)
Present value of EMV= Expected value cash
of
ECEN-65
38x 7.469= Rs.283.82 million.
Step 2: Computation of EMV at decision point D2

Decision taken Consequences The resulting EMVat this level
D2 Invest Rs 200 Rs. 283.82-200=83.82 million
million
|
D22 Stop
Here the decision criterion is 'select the EMV with the highest value
Step 3:
Therefore EMV with Rs 83.82 million will be considered
therefore we select the decis
taken at D2. cision
Step 4:
Computation of EMV at the point C
EMV Probability Expected value
83.82 0.7 58.67
0 0.3 -0
EMV at this stage 58.67
Step 5:
Compute EMV at decisions point D
Decision taken Consequences The resulting EMV at this level
Di1 carry out pilot Invest 20 million 58.67-20Rs. 38.67 million
production and market test
D 12 do nothing
0
EMV at this stage (Apply the EMV criterion) i.e., select
the EMV with the highest value
There optimal strategy is
1. Carry out pilot production
and market test.
2. If the result of pilot production and market test is
successful, go ahead with the
investment decisíon of Rs. 200 million' in establishing
a plant.
3. If the result of pilot production and market test is failure,
stop.
Evaluation of decision tree approach
1.It portrays inter - related, sequential and critical multi dimensional elements of
major project decisions.
2 Adequate attention is' given to the critical aspects
in an investment decision
which spread over a time sequence.
3 Complex projects involve huge out lay and hence risky. There is the need to
define and evaluate scientifcally the complex
managerial problems, arising our
of the sequence of interrelated decisions with consequential outcomes of igt
risk. It is effectively answered by decision tree approach.
ECEN-66
4. Structuring a complex project decision with many sequential investment

decisions demands effective project risk management. This is possible only with
the help of an analytical tool like decision tree approach.
5. Able to eliminate unprofítable outcomes and helps in arriving at optimum
decision stages in time sequence.
Prob-0.6
Invest Rs. C2 Annual cash inflow.
Carryout pilot Da 200m

production and
(c
Cu Success Annual cash inflow
market test
0.7 C22 Rs. 20 million
Di (20m) D2 Stop
Prob=0.4
Failure
Prob-0.3
D2
Do nothing
3. One urn contains 2.white and 2 black balls; a second urn contains 2 white and 4
black balls. (i) If one ball is chosen from each urn, what is the probability that they
will be of the same colour? (ii) If an urn is selected at random and one ball is drawn
from it, what is the probability that it will be a white ball? [MODEL QUESTION]
Answer:
(1) The event (E) both the drawn balls are, of the same colour' has two mutually
exclusive forms, either E, (both white) or E, (both black). So, by the theorem of total
probability.
P(E)=P(E,) +P(E)
But E is a compound event formed by two independent events of drawing a white ball
from each urn. Hence P(E)=*=

Similarly, E, is also a compound event, and P(E,)*
Hençe, the required probability is
(i) A white ball can be selectediin two mutually exclusive ways:

(A) When urn I is selected and a white ball is drawn from it;
(8) When urn II is selected and a white ball is drawn from it,
To find the probability of event 4, we note that the selection of urn I itself'depends on
chance and has probability. Once urn I

has been selected, the probability
ECEN-67
BLLRELEUCATOS
Therits the thorem of runi prsturiky P{4)=
P)
ECEN-
VALUE ENGINEERING ANALYSIS

MultipleCholce Type
guestions
1. In brain stormingg [MODEL QUESTION]
a) all feasible suggestions are recorded only
b) all feasible and non-feasible suggestions are recorded
c) persons are not encouraged to express their views freely
d) None of these
Answer: (b)
2. The following is known as function value [MODEL QUESTION]

a) Cost value
b) Exchange value
c) Use value
d) Esteem value
Answer: ()
3.The following is the advantage of value engineering [MODEL QUESTION]

a) it is a much faster cost reduction technique
b) it is a less expensive technique
c) it reduces production cost
d) all of the above.
Answer: (d).
SlotASwatypeouestion
1. Define value analysis. Discuss the symptoms favouring the application of value
MODEL QUESTIONI
analysis.
Answer:
Value analysis is the systematic application of recognized techniques which identify the
function of a product or service, establish a monetary value for the function and provide
the necessary function reliably at the lowest overall cost.
It is an organized approach to identity unnecessary costs associated with any product,
material part, component, system or service by analyzing the function and eliminating
such costs without impairing the quality, functional reliability, or the capacity of the
product to give service.
more.
One can definitely expect very good results by initiating a VA programme if one or
of the following symptoms are present:
.Company's products show decline in sales.
2. Company's prices are higher than those of its competitors.
production.
3.
3. Raw materials cost has grown disproportionate to the volume of
ECEN-69
POPULAR PUBLIGATIONS
4. New designs are becing introduced.

5. The cost of manufacture is
rising disproportionate to the
6. Rate of return volume of
on investment has a falling trend. produs.
uction
7. Inability
of the fim to meet its delivery commitments.
2. Discuss the
objectives of value engineering.
Answer: MODELQUESTIO
The objectives of value engineering
. Simplify the product
are as follows:
2. Use (new)
cheaper and better materials
3. Modify and
improve product design
4. Use efficient
processes
5. Reduce the product
cost
6. Increase the utility of the product
by economical means.
7. Save money or increase
the profits.
The value content of each piece
. Does its use contribüte of a product is assessed using the following
to value? questione
4 2. Is its cost proportionate to its usefulness?
3. Does it need all its features?
1
Long AnSwarT pe Ouestions
1.Three projects P, Q and R
involve investment of Rs.
54,000respectively. Their cash 40,000 of Rs 24, 000 andR
flow and respective probabilities
Alternatives are given below
Project: P | Cash Flows Probability
High Demand 0.5
T2 Medium Demand 80, 000 0.3
Low Demand 65, 000 0.2
30, 000
Project: Q
High Demand
Medium Demand 48, 000 0.2
Low Demand 32, 000 0.5
25, 000 0.3
r
Project: R
High Demand
1,10,000
Medium Demand
44, 000
T0.4
Low Demand 0.3
30, 000 0.3
ECEN-70
Using 10% as the rate of return, Bank the projects according to Profitability Index
(PI) methods. WBUT 2014]
Answer:
Expected cash flow of project
P=(0.5x80, 000)+ (0.3x65,000)+ (0.2x 30,000)
40,000+19,500+6,000 =65,500Rs.

Q= (48,000x0.2)+(32,000x0.5)+ (25,000x0.3)
=
9,600+16,000+7,500 |33,100Rs.|

R=(1,10,000x0.4) + (44,000x 0.3) +(30,000x0.3)
44,000+13,200+9,000 =| 66,200 Rs.
value ofexpected cash flows

PI of project=resent
Investment outlay
(1) (2) (3) (4)=(2)+(3

Project PV of expected cash flows Investment PI
P 65,500 x PVIF (10%, 1y) 40,000 1.48 (Rank 15)
= 65,500x 0.909= 59,085
Q 33,100x 0.909=30,088 24,000i1.25 (Rank 2)
R 66,200x 0.909 = 60,176 54,000 1.11(Rank 3")
2. Discuss the steps of value engineering. [MODEL QUESTION]

Answer:
The basic steps of valuc engineering are as follows:
a) Blast i) Identify the product
ii) Collect relevant information
ii) Define different functions
b) Create iv) Different alternatives
v) Critically evaluate the alternatives
c)Refine vi) Develop the best alternative
vii) Implement the alternative.
ECEN-71
Step 1:
Identify the product: First, identify the component for study, In fte. ure,
any des
change should add value and it should not make the product as obsole
obsolete
one.
or
engineering can be applied to a product asa whole to sub-unit. Va
Step 2:
to following
Collect rclevant information: Införmation relevant the following must be collecte
Technical specifications with drawings ted.
Production processes, machine layout and instruction sheet
Time study details and manufacturing capacity
Complete cost data and marketing details.
.Latest development in related products
Step 3:
Define different functions: Identity and define the primary, secondary and
tertie
ruan
functions of the product or parts of interest. Also, specifj the value
content of eai
function and identify the high cost areas.
Step 4:
Different alternatives: Knowing the functions of each component part and
manufacturing details, generate the ideas and create different alternatives so as i
increase the value of the product. Value engineering should be done after a bran
storming session. Al feasible or. non-feasible suggestions are recorded without an
criticism, rather persons are encouraged to express their views freely.
3. Define value. What are the differert types of value - Explain.[MODEL QUESTI0
Answer:
The tem 'válue' is used in different ways and, consequently, has different meanings. Th
designer equates the value with reliability; a purchase person with price paid for theite
a production person with what it costs to manufacture and a sales person with what the
customer is willing to pay. Value, in value investigation, refers to "economic value
which itself can be divided into four types: cost value, exchange value, use valuc, an
esteem value. These are now briefly described.
Cost Value: It is the summation of the labour, material, overhead and all other elemens
of cost required to produce an item or provide a service compared to a base.
Exchange value: It is the measure of all the properties, qualities and features o
product, which make the product possible of being.traded for another product or
money. In a conventional sense, exchange value refers to the price that a purchaser
ffer for the product, 'the price being dependent upon satisfaction (value) which
ECEN-72
ONOMICSFOR ENGINHERS
Are n t kAt. Vahr hrnnd tihvn the

shNt usists of twe partaN e
e a Rs knn as tde tiuthw vadK Tte use value is evJual the value tho
to of
Nti NAHN. Ted t is t NiY ual by the buver (buver's view), or the
xrnd dy te naanuttrw (mamutavturer's view) in onler to ensure that the
t YtdYums s nwadad tiunths ettkicntty. The use vale is the tnudamental
&mNAYHN adx. An m withr "ue vale" can have neither "exehange value"
AYtm vada".
Bstre alne" t mvvdves the qalties and appoaraIne of a pzdunt (like a TV set),
wad ra? pm1S and crmate in thenm a desire to pxissess the pevduet. Therotdre,
m adr is the ir mil hy the ayer or tthe cost incurrod by the nmaufacturer
md the e nad
ECEN-73
CAPITAL BUDGETING
Multiple Cholce Type Questions
1. Which of
the flowing is not a capital budgeting
a) Cost comparison technlquo? WBUT
method 201
b) Pay back policy method
c) Net present value
method
d) Internal rate of retum
method
Answer: (a)
2. If you do not know the
discount rate for a project, the right
to be used would be investment cttau
[MODELQUESTIONterlon
a) IRR
b) NPV
c) BCR
d) None of these
Answer: (a)
3. The NPV of a simple project.
a) increases when the discount rate
increases
b) decreases [MODEL QUESTION
c) remain same
d) none of these
Answer: (6)
4. Cash flows are assumed to

a) beginning of years only
arise at [MODEL QUESTION
b) end of years only
c) both of above
d) none of these
Answer: (¢)
Short Answer Type Cuestions

1. Define NPV. What are the differences
between IRR and NPV? WBUT 2015|
Answer:
Net Present Value (NPV) Method
In this method all cash flows attributable to a capital
investment projects are discounted
by a chosen percentage e.g. the firms weighted average
cost of capital to obtain the
present value of the future cash flows. If the present
value flows s
higher than the present value of the investments the proposal isof the future cash
accepted else rejected. "
ECEN74
ECONOMICSFOR ENGINEEPS
order to arrive at the net present value the present value of the suture cash flows Is
deducted from the initial investment.
NPV=- C
(1+K) (1+K} (1+K 1 C
i.e, NPV =2
(1+KY
where C initial investment (cash out flows)
C,= cash inflows occurring at time

K Discount rate.
NPV vs. IRR Method

Under the net present value method the cash flows are-converted into present values by
the IRR
using discount rates which is usually taken to be the fim's cost of capital. Under
method no such discount rate is given and it is to be selected such that the PV of capital
outlay exactly equals the PV of net cash flows.
In general, the NPV and IRR methods lead to the same accept reject
decision when a
single project is involved because of-
a. When discount rates greater than the IRR, NPV of
project is (-)ve.
b. When required rates> IRR, a project would
be rejected under this method.
2. Machine A costs Rs. 1,00,000 payable immediately. Machine B cost Rs. 1,20,000
half payable Immediately and half payable in one year's
time. The cash receipts
expected are as follows:
|B
Year (at the end) A
20,000
60,000 60,000
40,000 60,000
| 30,000 80,000
|20,000
[MODEL QUESTION]
With 7% Interest which machine should be selected?
Answer:
Machine A:
Y ear Cash Flow | DF@1% PV Rs.
Rs. 1,00,000
- 1,00,000 1.00000 -
0.93458 18,692
20,000
0.87344 52,406
60,000
40,000 0.81630 32,652
30,000 0.76289 22,887
ECEN-75
20,000 0.71299 14,260

NPV= 40,897
Machinc B:
|0 -60,000 1,00,000 -60,000
1 60,000 0.93458 - 56,075
2 60,000 0.857344 52,406
3 60,000 0.81630 48,978
80,000 0.76289 61,031
NPV= 46,340
Since Machine B has the higher
NPV, our decision should be to select machine B.
AA Company has two proposals" under consideration, both

projects cost
Rs.60,000. The following details of
the cash inflows and probability assigned are
avallable. Kindly advise the company on the project to
be chosen.
ProjectA ProjectB
Year Cash flows Probability|
Cash flows Probability
Rs. Rs.
10000 0.1 70000 0.15
20000 0.3 40000 0.25
30000 0.3 30000 0.30
40000 0.2 20000 0.25
70000 | 0.1 10000 0.05
[MODEL QUESTION]
Answer:
| Project A
Year Cash flows Rs. Probability |Expected monetary values
10000 0.1 1000
20000 0.3 |6000
30000 0.3 9000
40000 0.2 8000
| 70000 |0.1 |7000
Total 31000
Project B
Year .Cash flows Rs. Probability Expected monetary values
70000 0.15 10500
40000 .
0.25 10000
30000 0.30 9000
20000 0.25 5000
10000 0.05 500
Total 35000
ECEN-76
Doeision
pocted monctary bencfits of project B is lhigher than project A, therefore B is
preterable.
LongAnbwer Type Guestlons
1 Write short note on Profitability index. WBUT 2015

Answer:
Tis a time adjusted method of evaluating the investment proposals known as the Benefit
Cost (B/C) ratio or Profitability lndex (Pl),. Profitability lndex is
the ratio of the prescnt
value of cash inflows at the required rate of retum, to the initial cash outflow of the
investment. The formula for calculating benefit cost ratio or profitability index is as
follows:
Pl PV of cash flows/nitial cash outlay = PV(C)/0

A project may be accepted if its Pl is greater than one.
The Profitability Index and NPV criterion of evaluating investment proposals lead to the
same acceptance-rejection and ranking decisions. In what situations will they give
conflicting results?
When the capital outlay is the same, both NPV and PI will yield the same accept or reject
decision, wlhen NPV is positive, Pl will be more than one: Accept when NPV is
negative, Pl will be less than one: Reject.
2.Beta Limited is considering the acquisition of a personal computer costing Rs.

50,000. The, effective life of the computer is expected to, be five years. The
company plans to acquire the same either by borrowing Rs. 50,000 from fts
bankers at 15% Interest per annum or by lease. The company wishes to know the
lease rentals to be paid annually which wll match the loan option. The following
further information is provided to you:
The princlpal amount of the loan will be paid in five annual equal installments.
Interest, lease rentals, principal repayment are to be paid on the last day of each
year.
The full cost of the computer will be written off over the effective life of computer
on a stralght-llne basis and the same will be allowed for tax purposes.
he company's effective tax rate is 40% and the after tax cost of capital is 9%.
The computer will be sold for Rs. 1,700 at the end of the 5th year. The commission
on such sales is 9% on the sale value and the same will be paid.
You are required:
To compute the annual lease rentals payable by Beta Limited which will result in
Indifference to the loan option.
ECEN-77
POPULARPUBLICATIONS
The relevant discount factors are as follows:

Year 1
2 3 5
Discount Factor 0.92 0.84 0.77 0.71 0.65
MODEL QUESTIO-
Answer:
Working Notes:
1) Ycarly loan installment S.50,000

Rs.10,000
5
i) Interest onloan
Year
Rs. Rs. Rs. Rs. Rs.
Principal amount outstanding 50,000
40,000 30,000 20,000 |10,000
at the start of the year.a)
Interest at 15% (b) x0.15 7,500 6,0004,500 | 3,0001,500
ii) Annual depreciation on straight line basis Rs.50,000 = Rs.10,000
5
iv) Cash inflow at the end of year 5
Rs.
Salvage value 1,700
Less: Commission at 9% 153
1,547
Less: Tax at 40% 619
Net inflow 928
vComputation of net cash outflow under loan option

Year
Total
Rs. Rs. Rs.
Principal (repayment)
Rs. Rs. Rs.
10,000 10,000 10,000 10,000 10,000 50,000
Interest (form (i)) 7,500 6,000 4,500 3,000 1,500 22,500
Total
(A) 17,500 16,000 14,500 13,000 11,500 72,500
Less: Tax savings
at40%
On depreciation 4,000 4,000 4,000 4,000 4,000 20,000
e On interest 3,000 2,400 1,800 1,200 600 19,000
(B) 7,000 6,400 5,800 5,200 4,600 29,000
Less: Cash inflow at
the end of 5th year(C) 928 928
Net cash outílow
(A-B-C) 10,500 9,600 8,700 7,800 5,972 42,572
P.V. Discount factor
@9% 0.92 0.84 0.77 0.71 0.65
PV 9,660 8,064 6,699 5,538 3,882 33,843
ECEN-78
mputation of
Comp of the annual lease rentals to be indiffercnt to loan option
PV of desired total cash
outflows Rs.33,843
PVAF@9% for five ycars 3.89
Required annual after tax cash outflow
Rs.33,845= Rs.8,700
3.89
Annual lease rental is given by:

Annual after tax outlfowRs.8,700
1- rate 1-0.4
=Rs 14,500
Therefore, the annual lease rentals should Rs. 14,500 to be indifferent for the loan option.
3.Marling-Video Ltd. is considering building an assembly plant and the company

has two options, out of which it wishes to choose the best plant. The projected
Qutput is 10,000 pcs. per month. The following data are available:
Particulars Plant A Plant B

Rs.
30,00,000
Rs
Initial cost 22,00,000
Direct Labour cost p.a. (1st Shift) 15,00,000 7,50,000
(Second shift) 4,35 9,50,000
Overhead (per year) 2,50,0000 2,10,000
Both the plants have an expected life of 10 years after which there will be no
salvage value. The cost of capital is 10%. The present value of an ordinary
annuity of Rs. 1 for 10 years 10% is 6,1446. Ignore effect oftaxation.
You are determine what would be the desirable choice. [MODEL QUESTION]
Answer:
(A) Computation of differential cash flow (Rs.)
Particulars Plant A Plant B Differential
(a) b) Cash Outflow
b)-(a)
Direct labour cost p.a.
1 shift 15,00,000 7,50,000 (7,50,000)
2d shift 9,50,000 9,50,000
Overhead p.a. 2,50,000 2,10,000 (40,000)
Net Saving on using Plant A 1,60,0000
Present value of net saving on using PlantA

Rs. 1,60,000 x6,1446= Rs. 9,83,136
ECEN-79
POPULARPUDLIGATIONS
(B) Additionnl Cash Outlay for Plant A

Cost of Plant A (Rs.)
Cost of Plant B 30,00,000
Additional cash outlay required 22,00,000
for using Plant A
8,00,000
Analysis:
The net saving to the company
in choosing Plant A =
1,83,136. Hence, the
company should choose Rs. 9,83,136- Rs. 8,00.000
Plant A.
ECEN-80

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Economics 7th Sem

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ECONOMICS FOR ENGINEERS

1. Choose the correct alternatives for the following:

WDV stands for

l) Costs reflected in accounting system only are called

Salvage value means

Choose the correct alternatives for the following:

Chapter Name: "ENGINEERING DECISION MAKING"

i) WDV stands for

in) Costs reflected in accounting system only are called

v) Salvage value means

ENGINEERING DECISION MAKING

1. Gantt chart is used for

Short AnswerType, Questions

200-100 = 100 Rs.

Use consistent Viewpoint: and other should be consistentlv

3. What are the methods of job evaluation?

4. Discuss the basic principles of Engineering Economics. [MODEL QUESTION

Principle-2: Focus on 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: to the extent practicable, the

Long Answer Type Ouestlons

1. a) What are the major objectives of plant layout?

d) Product layout is used under following circumstances

- When capital intensity is high

- When situation demands

- When there is Lower capital intensity &

c) Annual demand = 75 x 12= 900 units

Economic Order Quantity

3. Write short note on

2C 2x60x 2000 = 566units (approx.)

5. A company has extra capacity that can be used to produce a sophisticated

Add fixed cost associated with unused capacity +Rs. 10,00,000

DEFINITION AND SCOPE OF ENGINEERING

1. Which of the following is true? WBUT 2014]

2. A demand curve can shift because of changing WBUT 2015]

5. To compute the construction cost per square foot of a building

6. Which one is fixed cost? [MODEL QUESTION]

2. What is meant by improvement and learning curve? State its benefits.

e)Helps in proper staff recruitment programmes.

DIFFERENT LIFE CYCLE STAGES

Production/ Maintenance & stage

4. Discuss the difference between fixed

Let C be the average cost of producing x units of a commodity and Ci be the AC of

when AC is minimum, MC intersects AC curve.

6. The cost, volume and profit relationship of a company is described by equation

7. a) Define Break even point. Represent the elements diagrammatically, and

9 (in 000) Output (Units)

ii) No. of units needed to be sold to make profit of Rs. 45,000

Long Answer TypeQuestionsS

Therefore, cost of replacing machinery 600MW

2. a) Discuss the Law of Demand.

Law of Demand states: Ceteri peribus i.e.,

b) Discuss the factors affecting the Demand. WBUT 2014]

of a goods by a consumer the consumer demands more of a goods at a lower price

income upon demand of a

c) Why does Supply curve generally slope upward?

Now, substituting P=41.667 0.9172 in the supply equation,

alsv atxtt by the

6. Dlscuss tho factors whlch affoct supply. [MODEL QUESTIONJ

more than betore at the given

9 (in 000) Output (Units)->