MM 315 ENGINEERING ECONOMY (2021-2022 FALL Semester)

LECTURER
Prof. Dr. Mustafa YURDAKUL
Room: 414
Phone: 5823414
E-mail: yurdakul@gazi.edu.tr
Address: Department of Mechanical Engineering, Faculty of Engineering, Gazi University, 06570, Maltepe, Ankara.
COURSE POLICY
2 Midterm Exams 30 % each ---- (For the mid-term exams you are responsible from all the material in the chapters
we will cover until the exam date. You are expected to solve all the examples and end-of-chapter problems in those
chapters)
1 Final exam 40 % ----(For the final exam you should study all the materials in the chapters provided in the COURSE
SCOPE and solve all the examples and end-of-chapter problems in those chapters)
COURSE SCOPE
1.COST CONCEPTS AND DESIGN ECONOMICS (Sullivan Chapter 2 (42-88)).
2.THE TIME VALUE OF MONEY (Sullivan Chapter 4 (125-199)).
3.EVALUATING A SINGLE PROJECT (Sullivan Chapter 5 (200-247).
4.COMPARISON AND SELECTION AMONG ALTERNATIVES (Sullivan Chapter 6 (248-309)).
5.DEPRECIATION AND CORPORATE TAXES (Park Chapter 9 (452-511))
6.DEVELOPING PROJECT CASH FLOWS (Park Chapter 10 (512-561))
7.INFLATION AND ITS IMPACT ON PROJECT CASH FLOWS (Park Chapter 11 (564-605))
COURSE BOOKS
•Engineering Economy, W. G. Sullivan, E. M. Wicks, C. P. Koelling, PEARSON Education Limited, Fifteenth Edition,
International Edition, 2012.
•Contemporary Engineering Economics, Chan S. Park, Prentice Hall, Fifth Edition, 2011.

1
 MM 315 Engineering Economy

INTRODUCTION
COST (Period Expenses-Cost per unit)
BREAK EVEN ANALYSIS
PRESENT ECONOMY ANALYSIS
To survive, businesses must be profitable. In other words, the revenue generated by business activities must
exceed the costs incurred in undertaking those activities. And herein lies the motivation for estimating costs.
Cost estimation, and thereby profitability, also is necessary for determining the economic advantage of the
business, which determines the ability of a company to be competitive. A squeeze on profits, from inaccurate
cost estimation, escalating costs, increased market competition, or excessive supply, sets the stage for
financial failure. It certainly results in withdrawing new products from the market shortly after they are
introduced or abandoning projects regardless of inspiration.

The goal is to achieve maximum design efficiency at the least cost.

How to distribute indirect costs to different product types?
Activity Based Costing (ABC) Method
Indirect (Overhead) Cost per unit
Calculation of profit (unit margin) per unit for each product type:
23
What happens if you do not assume both passes have equal machining times ?
•Are there any changes in Vmin and Tmin ?
•Diameter changes. So what?

ANOTHER QUESTION;
HOW DO WE CALCULATE COST PER UNIT AT A MACHINE?
For example, is there a set-up cost portion in the cost per unit at the machine?
Cost Analysis of Automated
Flow Lines
An important measure of flow line performance
L C is the cost per item
produced. Let Cm equal the cost of raw materials per product, where the
product refers to the unit of output from the line. Let represent CL the
cost per minute to operate the line. This would include labor, overhead,
maintenance, and the allocation of the capital cost of the equipment over
its expected service life. The last item, capital cost, will likely be the
largest portion of C pc. The cost of any disposable tooling should be
computed on a per workpiece basis and is symbolized by Ct. The general
formula for calculating the cost per workpiece is

C pc Cm CLTp Ct
Analysis of Production Lines (NO BUFFER CASE)
Line Efficiency: Proportion of downtime:
Tc FTd
E D E D 1
Tp Tp

Cost per unit: C pc Cm CoTp Ct Cpc = Cost per unit (part) ($/unit)
Cm = Cost of raw material ($/unit)
Co = Cost of operating the line ($/min)
Ct = Tooling cost (($/unit)

This equation does not account for such things as

-yield or scrap rates,
-inspection cost associated with identifying defective
items produced,
-repair cost associated with fixing the defective items.
 C pc Cm CLTp Ct
 However, yield or scrap rates, inspection cost associated with identifying
defective items produced, repair cost associated with fixing the defective
items. can be incorporated into the cost equation.
 We will let n represent the number of workstations on the flow line and Q will
designate the quantity of workparts produced off the line. Q may represent a
batch size or it may mean the number of parts produced over a certain time
period. We will use it in whatever way we find convenient. However, one note
of caution is this: Q may include a certain number of defects if the flow line has
a habit of not producing 100% good product.

 (with repair cost)--- (Cpc) = Cpc + (proportion of defectives) x (cost of repairing

one defective product)

 (with scrap cost)--- (Cpc) = Cpc / (proportion of correct parts)

 (with inspection costs)--- (Cpc) = Cpc + (proportion of inspected parts) x (cost of

inspection per part)
EXAMPLE
Suppose that a 10-station transfer machine is under consideration to produce a component used in a pump.
The item is currently produced by more conventional means, but demand for the item cannot be met. The
manufacturing engineering department has estimated that the ideal cycle time will be Tc = 1.0 min. From
similar transfer lines, it is estimated that breakdowns of all types will occur with a frequency, F = 0.10
breakdown/cycle, and that the average downtime per line stop will be 6.0 min. The scrap rate for the
current conventional processing method is 5% and this is considered a good estimate for the transfer line.
The starting casting for the component costs $1.50 each and it will cost $60.00/h or $ 1.00/min to operate
the transfer line. Cutting tools are estimated to cost $0.15/workpart. Using the foregoing data, it is desired
to compute the following measures of line performance:
1) Production rate.
2) Number of hours required to meet a demand of 1500 units/week.
3) Line efficiency.
4) Cost per unit produced.
The average production time per piece: Tp = 1.0 + 0.10(6.0) = 1.6 min

1
The average production rate for the line: Rp 0.625 piece/min or 37.5 pieces/h
1.6
However, correcting for the scrap rate of 5%, the actual production rate of good products is Rp = 0.95(37.5) = 35.625 pieces/h

To compute the number of hours required to produce 1500 units/week (we assume that this means 1500 good units plus scrap
rather than 1500 with 5% scrap included), we divide the production rate of 35.625 units/h into the 1500 unit requirement:

1500
hours 42.1h
35.625
The line efficiency is found by taking the ratio of the ideal cycle time to the average production time: 1.0
E 0.625
1.6
The proportion downtime:
0.10(6)
D 0.375
1.6
The cost per product can be computed by dividing the cost determined by C pc Cm CLTp Ct with the yield of good

parts (0.95): 1 = $3.42/good unit

C pc (1.50 1.00 1.60 0.15)
0.95
The $3.42 represents the average cost per acceptable product under the assumption that we are discarding the 5% bad units at no
salvage value and no disposal cost. Suppose that we could repair these units at a cost of $5.00/unit. To compute the cost per
piece, the repair cost would have to be added to the other components of C pc Cm CLTp Ct . Also, since repair of
the defects means that our yield will be 100%, the 0.95 used above to obtain a cost of $3.42 can be ignored.

C pc 1.50 1.00 1.60 0.15 0.05(5.00) = $3.50/unit

The lower cost per unit is associated with the policy of scrapping the 5% defects rather than repairing them. Unless the extra units
are needed to meet demand, the scrap policy seems preferable.
 COST ANALYSIS OF PARTIALLY AUTOMATED TRANSFER LINES WITHOUT STORAGE

There are automatic stations and manual stations. Bre Breakdowns do not occur at the manual stations because the human
operators are flexible enough to adapt to the kinds of variations and disruptions that cause an automatic workhead to stop.
Breakdons occur only in automated stations (e.g., tool failures, defective components. electrical and mechanical
malfunctions, etc.). Let p equal the probability of a station breakdown for an automatic station.

n = total number of workstations on the line,

na = number of automatic stations
no = number of manual operator stations
Co = operator cost per manual station ($/minute),
Cas = cost per automatic workstation ($/minute)

Cat = cost per minute of the automatic transfer mechanism (used for all stations, manual and automatic) to transport the
workparts. Let this cost be symbolized by, it is not a cost per station, but rather a cost that includes all n stations.
Combining these costs, the total line cost CL is given by
CL noCo naCs Cat
To figure the average production time, the ideal cycle time is added to the average downtime per cycle as follows:
Tp Tc FTd Tc na pTd

C pc Cm CLTp Ct becomes C pc Cm (noCo naCas Cat )(Tc nc pTd ) Ct

EXAMPLE
A proposal has been made to replace one of the current manual stations with an automatic work head on a 10-station
transfer line. The current system has six automatic work heads and four manual stations. The current cycle time is 30 s. The
bottleneck station is the manual station that is the candidate for replacement. The proposed automatic station would allow
the cycle time to be reduced to 24 s. The new station costs at $0.25/min. Other cost data for the existing line:
Co = $0.15/min
Cas = $0. 10/min
Cat = $0.10/min
Breakdowns occur at each of the six automatic workstations with a probability p = 0.01. The average downtime per
breakdown is 3 min. It is estimated that the value of p for the new automatic station would be p = 0.02. The average
downtime for the line would be unaffected. Material for the product costs $0.50/unit. Tooling costs can be neglected ( Ct = 0).
It is desired to compare the challenger (the new automated station) with the defender (the current manual station) on the
basis of cost per unit.

For the current line, the production time is

Tp = 0.5 + 6(0.01)(3) = 0.68 min/unit
CL = 4(0.15) + 6(0. 10) + 0.10 = $1.30/min
C pc = 0.50 + 1.30(0.68) = $1.384/unit
For the transfer line with the new workhead replacing the current manual station, similar computations are as follows:
Tp = 0.4 + (6 x 0.01 + 0.02)(3) = 0.64 min/unit
CL = 3(0.15) + 6(0.10) + 0.25 + 0.10 = $1.40/min
C pc = 0.50 + 1.40(0.64) = $1.396/unit

The conclusion is that the improved performance of the automatic workhead does not justify its
greater cost. It should be noted that the reduced reliability of the automatic workheads figures
prominently in the cost calculations. If the value of p for the new automatic workhead had been
equal to 0.01 instead of 0.02, the conclusion would have been reversed.
PRESENT ECONOMY EXAMPLES
59
General Price–Demand Total Revenue Function as a
Relationship (p = f(D)) Function of Demand
Combined Cost and Revenue Functions, and Breakeven Points, as
Functions of Volume, and Their Effect on Typical Profit (Scenario 1)
•There is a profit range between break-even points (D’1and D’2) and
maximum profit point (D*)