MODULE 10 Part A

Project Management and Economy

– engineering cost and estimating

Expected Outcomes
After completing this module, you should be able to describe: the engineering
cost and its estimating
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Engineering Cost

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Engineering Cost

• From that relation we may understand

the profit and lost region which is;
– Breakeven : total revenue = total cost (point
of which we are just getting by)
– Profit region : total revenue > total cost (we
are making money)
– Loss region: total revenue < total cost (we
are going into debt!)
– The formula for BEP;
• Total Sales x volume,y = Contribution @ Fixed
cost + (Variable cost x volume,y)
• Total Sales x volume,y = Total cost
• (Total Sales)y = FC + (VC)y

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 Engineering Cost

• Example 2.1
– Your company manufacturers a product and has a fixed cost of RM6000. The
product was selling for RM3 each at a variable cost of RM1.
– What is the breakeven volume of the product?
– If your company plans to sell 3600 units, how would you assess the ‘margin of
safety’?
– What factors could affect the calculation of the breakeven volume?

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 Engineering Cost

Solution
• FC = RM6000, TS = RM3, VC = RM1 #TS = Total sales
• TS x volume,y = FC + (VC x y)
• (TS – VC)y = FC
• Y = FC / (TS-VC)
• Y = RM6000 / RM(3 – 1)
• Y = 3000 units
• Then the margin of safety = 3600 – 3000 = 600 units
Factors contribute towards breakeven calculation is sales price. If the sales price is
higher, the breakeven will be decrease and so forth.

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 Engineering Cost

• Example 2.3
– To boost the company profit, your company decided to sell automotive part at
‘Jom Heboh’ carnival. Spare part A can be purchased at RM2.00 with the privilege
of returning all unsold unit. The rental of the stand at the carnival is RM400.00,
payable in advance. Product A will be sold at Rm2.50 each.
– How many product A must be sold to breakeven?
– How many product A must be sold to yield a profit of RM500.00?

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 Engineering Cost

Solution
• TS x y = FC + (VC x y)
• (TS – VC)y = FC
• Y = FC/ (TS – VC)
• Y = RM400 / RM(2.50 – 2.00)
• Y = 800 unit

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 Engineering Cost

• To achieve RM500.00 profit,

• TS x y = FC + (VC x y) + Profit
• (TS – VC)y = FC + Profit
• Y = FC + Profit / (TS – VC)
• Y = RM(400 + 500) / RM(2.50 – 2.00)
• Y = 1800 unit

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• Example 2.3
• Your management requires you, as an engineer, to consider two products with the
following unit prices, fixed cost and variable cost.
• What is the breakeven point for each product in unit?
• Compute the profits of each product if sales in units are 10% above the breakeven
point?
• What product would fare better if sales dropped to 5000 units? Justify the reason.
• Which business would fare better if the market collapsed and the price per unit fell
to RM2.50? Why?
Spare part – intake Selling price per unit Variable cost per unit Fixed cost of
type (RM) (RM) operation per year
(RM)
Intake manifold 5.00 1.00 25000.00
Carburetor 5.00 3.00 12500.00

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• Solutions
• ⸫ FC = RM25000, Sales = RM5.00, Variable Cost = RM1.00 (intake
manifold)
• TC(y) = FC + VC(y)
𝐹𝐶 𝑅𝑀25000
• Y (TC – VC) = FC, 𝑦 = = = 6250 𝑢𝑛𝑖𝑡
𝑇𝐶−𝑉𝐶 𝑅𝑀5.00−𝑅𝑀1.00
• ⸫ FC = RM12500, Sales = RM5.00, Variable Cost = RM3.00 (carburetor)
• TC(y) = FC + VC(y)
𝐹𝐶 𝑅𝑀12500
• Y (TC – VC) = FC, 𝑦 = = = 6250 𝑢𝑛𝑖𝑡
𝑇𝐶−𝑉𝐶 𝑅𝑀5.00−𝑅𝑀3.00

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• If sales increase by 10%, = 6250 unit x 110% = 6875 unit

For intake manifold, profit = (TC – VC) y – FC For carburetor, profit = (TC – VC) y – FC

= (RM5 - 1) (6875 unit) – RM25000 = [(RM5 -3) (6875 unit) – RM12500

= RM2500 = RM1250

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• If the sales dropped to 5000 units,

For intake manifold, profit = (TC – VC) y – FC For carburetor, profit = (TC – VC) y – FC

= (RM5 - 1) (5000 unit) - RM25000 = [(RM5 - 3) (5000 unit) – RM12500

= - RM5000 (losses) = - RM2500 (losses).

Sales of carburetor losses less than intake

manifold.

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• If the price per unit plummet to RM2.50,
For intake manifold, profit = (TC – VC) y – FC For carburetor, profit = (TC – VC) y – FC

= (RM2.50 – 1.00) (6250 unit) - RM25000 = [(RM2.50 – 3.00) (6250 unit) – RM12500

= - RM15625 (losses) = - RM15625 (losses)

Both make a loss if the sales price plummet.

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 Engineering Cost

• Summary
– Classification of cost will determine the pattern of engineering cost

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