PRESENT ECONOMY

What is Present Economy?

 involves the analysis of problems for

manufacturing a product or rendering
a service based on present or
immediate costs.
 usually occur when the effects of time
such as interest and depreciation are
negligible.
 employed when the alternatives to be
compared will provide the same result
and the length of time involved in the
study is relatively short.
Rules:

1. When revenues and other economic benefits are present and vary
among alternatives, choose the alternative that maximizes overall
profitability based on the number of defect-free units of a product or
service produced.
2. When revenues and other economic benefits are not present or are
constant among all alternatives, consider only the costs and select the
alternative that minimizes the total cost per defect-free unit of
product or service output.
  Selection of Material
 Selection of Method

Applications of  Site Selection

Present  Economy of Tool and Equipment

Maintenance
Economy  Economy in the Utilization of
Personnel
Selection of Material

 A diesel engine uses Type A filter and high-grade lubricating oil costing
Php5.50 per liter. With this filter, the oil and the filter have to be changed
every 500 hours of operation, and 5 liters of oil have to be added every
100 hours. This filter costs Php148 a piece. Eighty liters of oil fill the
engine. Another type, filter B, costing Php120 may be used with a lower
grade of oil costing Php4.80 per liter. However, if this filter is used, the oil
and filter have to be changed every 300 hours and 10 liters are added
after each 150 hours the engine is used. Which type of filter and oil
would you recommend?
 Problem Details:
Selection of Method

 A manufacturer has a contract to produce 5,000 units of a certain device.

The device can be made by highly-trained workmen working individually.
The device can also be made by less-skilled workmen working together if
they are given specialized equipment and proper supervision. The highly-
trained workmen are paid Php20.00 per hour, and each can produce one unit
every 2 hours, on the average. The specialized equipment can be placed in
operation at an original cost of Php60,000 and it will be worthless at the
time all the 5,000 units are manufactured. With this equipment, four men,
paid at Php15.00 each per hour, and a foreman, paid at Php25.00 per hour,
can do the work. All the five men working together can finish one unit in 15
minutes. Determine the gain or loss if the specialized equipment is used
Site Selection
 A certain masonry dam requires 200,000 cu.m. of gravel for its construction. The
contractor found two possible sources for the gravel with the following data:

Source A Source B
Average distance (gravel pit to dam site) 3.0 km 1.2 km

Gravel cost (per cu.m.) - Php10.00

Purchase price of pit Php800,000 -
Road construction necessary Php450,000 -
Overburden to be removed - 90,000 cu.m.
(at Php4.20 per cu.m.)
Hauling cost per cu.m.-km. Php4.00 Php4.00

Which of the two sites will give lesser cost?

Costing

Source A Source B
Economy of Tool and Equipment
Maintenance
 A machine used for cutting materials in a factory has the following outputs per hour at various speeds and
requires periodic tool regrinding at the interval cited.


Speed Output per hour Tool regrinding

A 200 pieces every 8 hours
B 250 pieces every 7 hours
C 280 pieces every 5 hours

A set of tools costs Php1,800 and can be ground twenty times. Each regrinding costs Php18.00 and the time
needed to regrind and change tools is 1 hour. The machine operator is paid Php28.00 per hour, including the time
the tool is changed. The tool grinder who also sets the tools to the machine is paid Php25.00 per hour. The
hourly rate chargeable against the machine is Php54.00, regardless of machine speed. Which speed is the most
economical?
Economy in the Utilization of Personnel

 A contractor has a job which should be completed in 100 days. At present,

he has 80 men on the job and it is estimated that they will finish the work in
130 days. Of the 80 men, 50 are each paid at Php220.00 a day, 25 at
Php280.00 a day, and 5 at Php350.00 a day. For each day beyond the original
100 days, the contractor has to pay Php500.00 liquidated damages.
a. How many more men should the contractor add so that he can complete
the work on time?
b. If of the additional men, 2 are paid Php280.00 a day and the rest at
Php220.00 a day, would the contractor save money by employing more
men and not paying the fine?
 Exercises

1. A machine part to be machined may be made 2. The ore of a gold mine in the Mountain Province
either from an alloy of aluminum or steel. There contains, on the average, 0.5 gram of gold per
is an order for 8 000 units Steel cost P 3.80 per ton One method of processing costs 1 650 per
kg, while aluminum cost 8.70 per kg If steel is ton and recovers 93% of the gold, while another
used, the steel per unit weighs 110 grams; for method cost only 1 500 per ton and recovers 81%
aluminum, 30 grams When steel is used, 50 units of the gold If gold can be sold at 8 500 per
ca be produced per hour for aluminum, 80 units gram, which method is better and by how much?
per hour with the aid of a tool costing 640
which will be useless after 8 000 units are
finished The cost of the machine and the
operator is 10.80 per hour If all other cost are
identical, determine which material will be more
Economical.