62

UNIT V

PRESENT ECONOMY

Whether it is a business situation or a day-to-day event in somebody’s

personal life, there are a large number of economic decisions making involved.
One can manage many of these decision problems by using simple economic
analysis. For example, an industry can source its raw materials from a nearby
place or from a far-off place. In this problem, the following factors will affect the
decision:

• Price of the raw material.

• Transportation cost of the raw material.
• Availability of the raw material.
• Quality of the raw material.

Consider the alternative of sourcing raw materials from a nearby place with
the following characteristics:

• The raw material is more costly in the nearby area.

• The availability of the raw material is not sufficient enough to support
the operation of the industry throughout the year.
• The raw material requires pre-processing before it is used in the
production process. This would certainly add cost to the product.
• The cost of transportation is minimal under this alternative.

On the other hand, consider another alternative of sourcing the raw

materials from a far-off place with the following characteristics:

• The raw material is less costly at the far off place.

• The cost of transportation is very high.
• The availability of the raw material at this site is abundant and it can
support the plant throughout the year.
• The raw material from this site does not require any pre-processing
before using it for production.

Under such a situation, the procurement of the raw material should be

decided in such a way that the overall cost is minimized.

The above example clearly highlights the various components of cost that
are involved in each of the alternatives of the decision-making process as well as
a method of taking a suitable decision.
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In this section, the concept of present economy studies is illustrated using

suitable examples in the following areas:

• Selection of material
• Selection of method.
• Selection of design.
• Site selection.
• Comparison of proficiency of workers.
• Economy of tool and equipment maintenance.
• Economy in the utilization of personnel.

Selection of Material

The cost of a product can be reduced greatly by substitution of the raw materials.
Among various elements of cost, raw material cost is most significant and it forms
a major portion of the total cost of any product. So, any attempt to find a suitable
raw material will bring a reduction in the total cost in any one or combinations of
the following ways:

• Cheaper raw material price.

• Reduced machining/process time.
• Enhanced durability of the product.

Therefore, the process of raw material selection/substitution will result in finding

an alternate raw material which will provide the necessary functions that are
provided by the raw material that is presently used. In this process, if the new raw
material provides any additional benefit, then it should be treated as its welcoming
feature.

Examples

5-01 In the design of a jet engine part, the designer has a choice of specifying
either an aluminum alloy casting or a steel casting. Either material will provide
equal service, but the aluminum casting will weigh 1.2 kg as compared with 1.35
kg for the steel casting. The aluminum can be cast for P800.00 per kg and the steel
one for P350.00 per kg. The cost of machining per unit is P1,500.00 for aluminum
and P1700.00 for steel. Every kilogram of excess weight is associated with a
penalty of P13,000.00 due to increased fuel consumption. Which material should
be specified and what is the economic advantage of the selection per unit?

Solution

(a) Cost of using aluminum metal for the jet engine part:

Weight of aluminum casting/unit = 1.2 kg

Cost of making aluminum casting = P800.00 per kg
 64

Cost of machining aluminum casting per unit = P1,500.00

Total cost of jet engine part made of aluminum/unit
Cost of making aluminum casting = P800.00 per kg.
Cost of machining aluminum casting per unit = P1,500.00
Total cost of jet engine part made of aluminum/per unit
= Cost of making aluminum casting/per unit
+ Cost of machining aluminum casting/unit
= (800)(1.2) + 1,500
= P2,460.00

(b) Cost of jet engine part made of steel/unit:

Weight of Steel casting/unit = 1.35 kg
Cost of making steel casting = P350.00 per kg
Cost of machining steel casting per unit = P1,700.00
Penalty of excess weight of steel casting = P13,000.00 per kg

Total cost of jet engine part made of steel/unit

= Cost of making steel casting/unit
+ Cost of machining steel casting/unit
+ Penalty for excess weight of steel casting
= (350)(1.35) + 1,700 + 13,000(1.35-1.2)
= P4,122.50

DECISION The total cost/unit of a jet engine part made of aluminum is less
than that for an engine made of steel. Hence, aluminum is suggested for making
the jet engine part. The economic advantage of using aluminum over steel/unit is
P4122.50 – P2,460.00 = P1,662.50

5-02 A company manufactures dining tables which mainly consist of a wooden

frame and a table top. The different materials used to manufacture the tables and
their costs are given in Table 5.1.

Description of item Quantity Cost

Wood for frame and legs 0.1m3 P72,000.00/m3
Table top with summica finish 1 P18,000.00
Leg bushes 4 P60.00/bush
Nails 100 g P1,800.00/kg
Total labor 15 hrs P300.00/hr

Table 5.1 data for Example 5-2

In view of the growing awareness towards deforestation and environmental

conservation, the company feels that the use of wood should be minimal. The
wooden top therefore could be replaced with a granite top. This would require
additional wood for the frame and legs to take the extra weight of the granite top.
 65

The materials and labor requirements along with cost details to manufacture a
table with granite top are given in Table 5.2.

Description of item Quantity Cost

Wood for frame and legs 0.15m3 P72,000.00/m3
Table top with granite finish 1.62m2 P4,800.00/m2
Leg bushes 4 P150.00/bush
Nails 50 g P1,800.00/kg
Total labor 8 hrs P300.00/hr

Table 5.2 Data for Example 5-2

If the cost of the dining table with a granite top works out to be lesser than that of
the table with wooden top, the company is willing to manufacture dining tables with
granite tops. Compute the cost of manufacture of the table under each of the
alternatives described above and suggest the best alternative. Also, find the
economic advantage of the best alternative.

Solution

(a) Cost of table with wooden top

Cost of wood for frame and legs = 72,000(0.1) = P7,200.00

Cost of wooden top = = P18,000.00
Cost of bushes = 60 (4) = P240.00
Cost of nails =1,800(100/1000) = P180.00
Cost of labor = 300(15) = P4,500.00
------------------------------------------------------
Total = P30,120.00

(b) Cost of table with granite top

Cost of wood for frame and legs = 72,000(0.15) = P10,800.00

Cost of granite top = 4800(1.62) = P7,776.00
Cost of bushes = 150 (4) = P600.00
Cost of nails = 1,800(50/1000) = P90.00
Cost of labor = 300(8) = P2,400.00
------------------------------------------------------
Total = P21,666.00

The cost of a table with granite top is less than that of a table with a wooden top.
Hence, the table with granite top should be selected by the manufacturer.

(c) Economic advantage

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Cost of a table top with wooden top = P 30,120.00

Cost of a table top with granite top = P 21,666.00
Economic advantage of table with Granite top = P 8,454.00

Selection of Methods

There may be different methods of performing certain operations that produce the
same result. The role of the engineer is to determine the most economical among
the different methods.

Examples

5-03 The EL-J Construction and Development Corporation wishes to bid on the
digging of an irrigation canal in a nearby province which measures 2 meters wide,
1 meter deep, and 200 meters long. Laborers are available at P 360.00 a day for
an 8-hr day, and they can dig ½ cubic meter per hour on the average per laborer.
A ditch digging machine may be rented at a cost of P4,800.00 a day, in actual use
and in transit to and from the construction site. It takes one day, each way, for the
machine to be transported. Freight charges for transporting the machine will be
P12,000.00 each way. The machine operator will be paid P1,500.00 a day. He will
not be paid for going to and from the job site. In addition to the services of the
machine, 2 laborers would also be required. The ditch digging machine can
excavate 15 cubic meters per hour. If all workers and the machine are paid on a
full 8 hour day basis, determine the lowest bid price of the company allowing
P200,000.00 for profit and contingencies.

Solution

(a) By manual labor:

Volume of excavation = 2mx1mx200m = 4,000 cu.m.

Number of hours for laborers to excavate
4000𝑚3
= 𝑚3
= 8,000 hrs
1/2
ℎ𝑟

Wage per hour = P360/8hr = P45.00 per hr

Total cost = 8000 hr(P45.00/hr) = P 360,000.00

(b) By machine:

4000𝑚3 1
Time to excavate = 8 ℎ𝑟⁄𝑑𝑎𝑦 = 33 3 0r 34 days

Machine rental = (34+2) (P4,800) = P172,800.00

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Freight cost for machine = 2 (P12,000)

= P 24,000.00

Wages of operator = P1,500 (34)

= P 51,000.00

Wages of two laborers = 2(34)(P360)

= P24,480.00

Total cost = P 272,280.00

Therefore, digging by machine will be more economical by P87,720.00. The lowest

bid price of the company will be P472,280.00

5-04 The AARON Manufacturing Company received an order for producing

100,000 pieces of a certain machine part. A jig is required for production and two
methods are presented with the following properties:

Jig A
Estimated life = 100,000 pieces
First cost = P 80,000.00
Hourly wage of operator = P48.00
Number of pieces produced per hour = 100

Jig B
Estimated life = 100,000 pieces
First cost = P76,000.00
Hourly wage of operator = P40.00
Number of pieces produced per hour = 80

If the only consideration is economy of operation, determine which jig should be

used.

Solution

(a) For Jig A

Number of hours to finish the work

100,000 𝑝𝑐𝑠
= 𝑝𝑐𝑠 = 1,000 hrs.
100
ℎ𝑟
𝑃48
Total wage of operator = 1,000 hr( ℎ𝑟 ) = P48,000.00

First cost of Jig A = P80,000.,00

Total = P128,000.00
 68

(b) For jig B

100,000 𝑝𝑐𝑠
Number of hours = 𝑝𝑐𝑠 = P1,250 hrs
80
ℎ𝑟
𝑃40
Total wage of operator = 1,250 hr ( ℎ𝑟 ) = P50,000.00

First cost of jig B = P76,000.00

Total = P126,000.00

Therefore, Jig B is cheaper by P P2,000.00 and should be used.

Selection of Design

The design modification of a product may result in reduced raw material

requirements and reduced labor. Design is an important factor which decides the
cost of the product for a specified level of performance of that product.

Examples

5-05 Two alternatives are under consideration for a tapered fastening pin. Either
design will serve the purpose and will involve the same material and manufacturing
cost except for the lathe and grinder operations. Design A will require 16 hours of
lathe time and 4.5 hours of grinder time per 1,000 units. Design B will require 7
hours of lathe time and 12 hours of grinder time per 1,000 units. The operating
cost of the lathe including labor is P200 per hour. The operating cost of the grinder
including labor is P150 per hour. Which design should be adopted if 1,000,000
units are required per year and what is the economic advantage of the best
alternative?

Solution

Operating cost of lathe including labor = P200 per hr

Operating cost of grinder including labor = P150 per hr
(a) Cost of Design A
Number of hours of lathe time per 1,000 units = 16 hrs
Number of hours of grinder time per 1,000 units = 4.5 hrs

Total cost of design A/1000 units = Cost of lathe operation per 1,000 units
+ Cost of grinder operation/1,000 units
= 16(200) + 4.5(150)
= P3,875.00
Total cost of design A/1,000,000 units = 3,875(1,000,000/1,000)
= P3,875,000.00
 69

(b) Cost of design B

Number of hours of lathe time per 1,000 units = 7 hrs
Number of hours of grinder time per 1,000 units = 12 hrs

Total cost of design B/1,000 units = Cost of lathe operation/1,000 units

+ Cost of grinder operation/1,000 units
= 7(200) + 12(150)
= P3,200.00
Total cost of design B/1,000,000 units = 3,200(1,000,000/1,000)
= P3,200,000.00

DECISION: The total cost/1,000,000 units of design B is less than that of design
A. Hence, design B is recommended for making the tapered fastening pin.

Economic advantage of the design B over design A per 1,000,000 units

= P3,875,000 – P3,200,000
= P675,000.00

5-06 (Design selection for a process industry). The chief engineer of refinery
operations is not satisfied with the preliminary design for storage tanks to be used
as part of a plant expansion program. The engineer who submitted the design was
called in and asked to reconsider the overall dimensions in the light of an article in
the Chemical Engineer, entitled “How to size future process vessels?”
The original design submitted called for 4 tanks 5.2 m in diameter and 7 m
in height. From a graph of the article, the engineer found that the present ratio of
height to diameter of 1.35 is 111% of the minimum cost and that the minimum cost
for a tank was when the ratio of height to diameter was 4 : 1. The cost for the tank
design as originally submitted was estimated to be P9,000,000.00. What are the
optimum tank dimensions if the volume remains the same as for the original
design? What total savings may be expected through the redesign?

Solution

(a) Original design

Number of tanks = 4
Diameter of the tank = 5.2 m
Radius of the tank = 2.6 m
Height of the tank = 7 m
Ratio of height to diameter = (7/5.2) = 1.35
Volume/tank =𝜋𝑟 2 h = 𝜋(2.6)2(7)
= 148.72 m3

(b) New design

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(c) Cost of the old design = 111% of the cost of the new design (optimal
design)
Optimal ratio of the height to diameter = 4:1
h:d = 4:1
4d = h
d = h/4
r = h/8

Volume = (𝜋)r2h = 148.72 (since the volume remains the same)

h
𝜋(8 )2h = 148.72

148.72
h3 = 22 x 64 = 3,028.48
( )
7

h = 14.47 m

r = h/8 = 14.47/8 = 1.81 m

Therefore,
Diameter of the new design = 1.81 (2)
= 3.62 m
Cost of the new design = 9,000,000 (100/111)
= P8,108,108.11
Expected savings by the redesign = P9,000,000 - P8,108,108.11
= PP891,891.89

Site Selection

In the choice of a site, many factors are to be considered, among which are the
cost of the land, the construction cost at the different possible sites, the availability
of skilled labor, and many other factors. In cases involving site selection, care must
be taken in the economic study to include all pertinent factors that will affect the
work.

Example

5-07 Engr. Espinoza is bidding on the asphalting of a 7 km stretch of road. He is

confronted with the problem of choosing between two possible sites on which to
set up the asphalt- mixing machine. At site A, the average hauling distance is 2.5
km., the monthly rental would be P70,000.00 and the cost of installing and
dismantling the equipment would be P340,000.00. At site B, the average hauling
distance is 3.25 km, the monthly rental would be P13,000.00 and the cost of
installing and dismantling the equipment would be P144,000.00. The asphalt mix
 71

is to be hauled by a subcontractor at P8.40 per cubic meter per km of haul. At site

A, it would be necessary to hire 2 flagmen at P300.00 per work day. The job can
be completed in 30 weeks or 7 months working 6 days a week. The project requires
16,670 cubic meter of asphalt mix per km of road. Which site should Engr.
Espinoza choose and how much lower would his bid price be if he made the better
choice?

Solution

(a) For site A

Cost of hauling = 16,670(2.5)(8.40)(7) = P2,450,490.00
Rental = 70,000(7) = P 490,000.00
Cost of installing and dismantling = P 340,000.00
Salary of flagmen = 2(300)(6)(30) = P 108,000.00
----------------------------------
Total cost = P 3,388,490.00

(b) For site B

Cost of hauling =(8.40)(16,670)(7)(3.25) = P 3,185,637.00
Rental = 13,000(7) = P 91,000.00
Cost of installing and dismantling = P 144,000.00
-------------------------------------
Total cost = P 3,420,637.00

Site A should be chosen because it is cheaper by P32,147.00.

Comparison of Proficiency of Workers

In industrial operations where the efficiency of workers is a factor affecting costs,

it is usually observed that workers have varying efficiencies. Where the
proficiencies of workers can be translated into monetary values, efficient and
diligent workers are paid higher wages.

Example

5-08 Two workers, Dave and Ian, are engaged in the production of the same
product. Dave can produce 100 units per day and is paid P360.00 per day. Ian can
produce 120 units per day. If they work on identical machines, and the daily cost
for each machine exclusive of the wages of the workers is P320.00, determine (a)
the cost of each unit produced by Dave, and (b) the daily wage of Ian so that the
cost of each piece made by her will equal that of Dave.

Solution
 72

(a) Total cost of 100 units produced by Dave

= P 360 + P240
= P 600.00

Cost per unit = P600/100

= P 6.00/unit

(b) At P6.00 per unit, the total cost of the daily production of Ian is
= P6/unit (120 units/day)
= P720.00 per day

Daily wage of Ian

= P720 – P240
= P480.00 per day

5-09 Jeremy and Joshua work on identical machines and each produces 200
pieces per hour. Some of the pieces they produce are defective, but these pieces
can be repaired at a cost of P7.50 per piece. On the average, 10% of Jeremy’s
work are defective and 6% of Joshua’s work are defective. If Jeremy is paid P45.00
per hour and Joshua P55.00 per hour, determine the average cost per piece for
each worker considering only the cost of defective pieces and their wages.

Solution

Jeremy’s work

Wage = P45.00/hr
Cost of repair of defective pieces = 0.10(200)(7.50)
= P150.00/hr
Total = P150 + P45 = P195.00/hr

Average cost per piece = P195/200 = P0.975 per piece

Joshua’s work

Wage = P 55.00/hr
Cost of repair of defective pieces = 0.06(200)(7.5)
= P90.00/hr
Total = P55 + P 90 = P 145.00
Average cost per piece = P145/200 = P0.725

Economy of Tool and Equipment Maintenance

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In many activities, tools have to be sharpened from time to time, and equipment
have to be kept in optimum operating condition all the time. In certain cases,
experience will indicate the best time to perform certain operations to maintain
equipment at the highest level of efficiency.

Example

5-10 A certain lathe machine can be operated at three speeds with the following
results:

----------------------------------------------------------------------
Speed Output Time Between
(pieces per hour) Tool Grinds (Hours)
-----------------------------------------------------------------------
A 30 10
B 40 8
C 50 5

A set of Japanese unsharpened tools cost P1,500.00 and can be ground 15 times.
Cost of each grinding is P120.00. The time required to change and reset the tools
is 2 hours and the tool change setter is paid P50.00 per hour. Overhead costs on
the machine is P30.00 per hour including tool change time. At what speed should
the machine be operated?

Solution

Speed A
Cycle time = 10 + 2 = 12 hrs
Number of pieces per cycle = 10 (30) = 300 pieces
Cost per cycle:
Tool changer = P50(2) = P 100.00
Overhead = 12(P30) = P360.00
Unsharpened tool = P1,500/15 = P 100
Grinding = P120.00
Total cost = P100 + P360 + P100 + P120 = P680.00
Cost per piece = P680/300 = P2.26

Speed B:
Cycle time = 8 + 2 = 10 hrs
Number of pieces per cycle = 40 (8) = 320 pieces
Cost per cycle:
Tool changer = P50(2) = P100.00
Overhead = 30(10) = P300.00
Unsharpened tool = P1,500/15 = P 100.00
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Grinding = P 120.00
Total cost = P100 + P300.00 + P100 + P120 = P620.00
Cost per piece = P620/320 = P1.94

Speed C:
Cycle time = 5 + 2 = 7 hrs
Number of pieces per cycle = 50(5) = 250
Cost per cycle:
Tool changer = P50(2) = P100.00
Overhead = P30(7) = P210.00
Unsharpened tool = P1,500/15 = P100.00
Grinding = P120.00
Total cost = P100 + P210 + P100 + P120 = P530.00
Cost per piece = P530/250 = P2.12

Therefore, use speed B which has the least cost per piece.

Economy in the Utilization of Personnel

In many industrial operations, it is observed that a certain number of workers

cooperating on a specific phase of the work will lead to the highest productivity. An
increase beyond this number will often cause the taking into effect of the Law of
Diminishing Returns. An excess of workers will result in some being idle at certain
periods while waiting for the work of others to be completed. In such case,
economy dictates that only a sufficient number of workers be assigned to minimize
idleness.

Example

5-11 Engr. Elijah Espinoza is faced with the problem of possibly paying liquidated
damages of P 8,000.00 per day for the delay in the completion of his work in
accordance with a contract. The project is now on its completion stage and can
be completed in 40 days of 8 hour work day. At present, he has 40 men on the job
working 8 hours a day and with the contract expiring in 30 days, he decided to add
10 more men on the job. If all the workers are paid P320.00 per day, will Engr.
Espinoza be able to complete the job on time? How much money would he lose or
save with the addition of workers?

Solution

At present situation:
Labor cost = P320(40)(40) = P512,000.00
Penalty = P8,000(10) = P80,000.00
Total cost = P512,000 + P80,000 = P592,000.00
 75

No. of man-days required to finish = 40(40) = 1,600

Let x = no. of days to finish with 10 more men

(40+10)(x) = 1,600
x = 32 days
Labor cost = P320(50)(32) = P512,000.00
Penalty = P8,000 (2) = P16,000.00
Total cost = P512,000 + P16,000 = P528,000.00

Therefore, Engr. Espinoza will not be able to finish on time even with 10 more
men but he will save P64,000.00.