Higher Technological Institute " H T I "

Engineering

Engineering
Economy
Lecture 2

Dr. Yousef gamal El-shaghoul

Faculty of engineering, Suez University
Cost Concepts and Behavior
Life cycle cost
 Product life-cycle is concerned with covering costs in all
categories of the life cycle.

Research &
Developing
 Life-Cycle Cost include:
(A) First Cost
1. Machines
2. Tools
3. Training
4. Installation
5. Tooling and Support Equipment
 Life-Cycle Cost include:
(B) Operating and Maintenance cost:
1. Material

2. Labor
3. Over head cost required for the system
(C) Disposed Costs: The definition of disposal costs is the costs associated
with disposing of waste materials.

Salvage value = market value – disposed cost

What is a Salvage Value (Scrap value)?

Salvage value or Scrap Value is the estimated value of an

asset after its useful life is over and, therefore, cannot be
used for its original purpose.
For example, if the machinery of a company has a life of 5
years and at the end of 5 years, its value is only $5000,
then $5000 is the salvage value.
‫ ال يمكن‬،‫ وبالتالي‬،‫قيمة اإلنقاذ أو قيمة الخردة هي القيمة المقدرة لألصل بعد انتهاء عمره اإلنتاجي‬
5 ‫ سنوات وفي نهاية‬5 ‫ إذا كان عمر آلة الشركة‬،‫ على سبيل المثال‬.‫استخدامها لغرضها األصلي‬
.‫ دوالر هي قيمة اإلنقاذ‬5000 ‫ فإن‬،‫ دوالر فقط‬5000 ‫ كانت قيمتها‬،‫سنوات‬
Salvage Value Example
Let’s take an example to understand this.
•Let’s say that Treat Inc. has purchased equipment for
$100,000. The company found out that the useful life
of this equipment is ten years, and at the end of 10
years, the value of the equipment would be $10,000.

So the scrap value of the equipment is $10,000.

•Now, as we know that the value of the equipment is
$10,000, the depreciation ‫ استهالك‬for this equipment will
be calculated on = ($100,000 – $10,000) = $90,000.
 Life-Cycle Cost include:
(D) Fixed cost [F.C]:
1. Fixed costs remain unchanged as volume changes within
the relevant range.
2. Fixed costs are “fixed” in “total” as activity changes.
 Fixed cost [F.C]:
Fixed cost refers to those costs incurred by the company during the accounting
period under consideration that has to be paid no matter whether there is any
production activity or the sale activity in the business or not and the, examples of
which include rent payable, salaries payable, interest expenses and other utilities
payable.

The following example provides an outline of the most common fixed costs
. Each example states the topic, the important reasons, and additional comments
as needed. Here is the list of the top 11 most common Fixed Costs –
#1 – Depreciation
#2 – Amortization ‫ – اإلهالك‬1# ‫ – االستهالك‬2# ‫ – التأمين‬3#
#3 – Insurance
#4 – Rent Paid
‫ – اإليجار‬4# ‫ مصاريف‬- 5# ‫ – الضرائب‬6#
#5 – Interest Expense ‫مدفوع‬ ‫الفوائد‬ ‫العقارية‬
#6 – Property Taxes
#7 – Salaries ‫ – النفقات‬9#
‫ – مصاريف‬8#
#8 – Utility Expenses ‫ – الرواتب‬7#
‫المرافق‬
‫اإلعالنية‬
‫والترويجية‬
#9 – Advertising and Promotional Expense
#10 – Equipment Rental
‫ – تأجير‬10# ‫ – النفقات‬11#
#11 – Legal Expenses ‫المعدات‬ ‫القانونية‬
  Life-Cycle Cost include:
(E) Variable Costs [V.C]:
1. Costs that change in direct proportion with a change in the
volume within the relevant range
2. Variable costs “vary” in “total” as activity changes.
3. Variable cost per unit stays constant when activity changes
within the relevant range.
Types
#1 – Material Costs
#2 – Labor and Workforce
#3 –Fees, and Commissions
#4 – Transportation costs
 Let us assume that a company To calculate variable expenses Variable Costs = Cost per unit x Variable Costs = 45 x 18 x 30 =
that manufactures 900 linen for 30 days, we apply the given Total number of units $24300
shirts daily. To achieve this, the values to the formula:
company appoints 45 laborers
and pays each laborer $18 for
a day’s work.

To complete production, the manufacturer is forced to pay each worker: $40 for
a day’s work. That is twice the standard rates. But first, let us compute the total
expense.

Variable Expense = 40 x 45 x 30
Variable Expense = $54000
The difference between the costs of production between the two months –

54000 – 24300 = $29700

Thus, external factors caused a $29700 change in variable expense for other
months (despite outputting the same production levels).
( ‫الربح التشغيلي = إجمالي اإليرادات‬T.R) – ( ‫إجمالي التكاليف‬T.C)

 Life-Cycle Cost include:

(E) Total costs [T.C]:
Total costs Are fixed cost plus variable cost
T.C = F.C + V.C(x)
Where x: number of items

(F) Profit Equation:

 Operating profit = Total revenues (T.R) – Total costs(T.C)

( ‫ أجمالي التكاليف‬- ‫الربح التشغيلي = إجمالي اإليرادات‬

 Life-Cycle Cost include:
(E) Break even point [B.E.P]:
Total revenues (T.R) = Total costs(T.C)

Operating profit = Zero

B.E.P =profit – selling price

 E.X(1)
Investment company wanted to invest profits in the production of

refrigerators were the fixed costs (land,

buildings, machines,……….) is 2 million pounds and variable costs of

(raw material, paint,……..) is 500 pounds per refrigerator and sail

price of one refrigerator is 1000 pounds. Calculate the variable costs

of producing 10000 refrigerators per year, total costs, total return,

profit, draw the breakeven point and calculate the number of units

at this point
GIVEN DATA:
F.C = 2000000 Pounds U.V.C = 500Pounds
S.P = 1000 Pounds N =10000
Required:
(A)V.C (B) T.C (C) T.R (D) Profit
Solution:
(A) V.C = U.V.C *N = 500*10000 = 5000000 Pounds

(B) T.C = F.C + V.C = 2000000 + 5000000 = 7000000 Pounds

(C) T.R = S.P* N =1000 *10000 =10000000 Pounds

(D) Profit = T.R - T.C = 10000000 – 7000000 = 3000000 Pounds

N 0 10000

T.R 0 10000000

T.C 2000000 7000000

C

T.R

T.C