L/O/G/O Teknik Elektromedis

Universitas Muhammadiyah Yogyakarta

2015

Engineering
Economy
Week 2

Muhammad Al Azis Bachrun

 CONTACT
• Email: alazisbachrun@gmail.com
• Facebook: Muhammad Al-Azis Bachrun
• SMS/WA: +62 821 8750 2130

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 RULES
• Be honest.
• Do not disturb others.
• Please be on time.
• Please bring calculator every week.
• Please ask questions any time.

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 ASSESSMENT
• 2 Assignments : 20%
• 10 Quizzes : 20%
• Midterm Exam : 30%
• Final Exam : 30%

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 GRADE
A : ≥ 80.00
B : 70.00 – 79.99
C : 60.00 – 69.99
D : 50.00 – 59.99
E : < 50.00

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 REFERENCES
• Book:
 Donald G. Newnan, Ted G. Eschenbach,
Jerome P. Lavelle. Engineering
Economic Analysis. 9th ed, 2004.
Oxford University Press. New York, USA.
• Any related articles

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 ENGINEERING ECONOMY

• Main Objective: Decision making.

• Caused by: Limited resources.
• Based on economic aspect.

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 ENGINEERING ECONOMY

Main Objective: Decision making.

Caused by: Limited resources.

Decision is based on economic aspect.

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 RATIONAL DECISION MAKING

1) Recognize problem.
2) Define objective.
3) Assemble relevant data.
4) Identify feasible alternatives.
5) Select the criterion to determine the best
alternative.

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 RATIONAL DECISION MAKING

6) Construct a model.
7) Predict each alternative’s outcomes
8) Choose the best alternative.
9) Audit the result.

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 EXAMPLE (1)
A machine part is manufactured at a unit cost of Rp
400,- for material and Rp 150,- for direct labor. An
investment of Rp 500.000.000,- in tooling is required.
The order calls for 3 million pieces.

Halfway through the order, a new method of

manufacture can be put into effect that will reduce the
unit costs to Rp 300,- for material and Rp 100,- for direct
labor but it will require Rp 100.000.000,- for additional
tooling. Other costs are allocated at 2.5 times the direct
labor cost. What, if anything, should be done?

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 SOLUTION
• Continue with present method (do nothing)

Remaining products: 1.500.000

Material cost 1.500.000 x Rp 400,- = Rp 600.000.000,-
Direct labor cost 1.500.000 x Rp 150,- = Rp 225.000.000,-
Other cost 2.5 x DLC = Rp 562.500.000,-

Cost for remaining 1.500.000 pieces = Rp 1.387.500.000,-

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 SOLUTION
• Implement new method of manufacture.

Remaining products: 1.500.000

Additional tooling cost = Rp 100.000.000,-
Material cost 1.500.000 x Rp 300,- = Rp 450.000.000,-
Direct labor cost 1.500.000 x Rp 100,- = Rp 150.000.000,-
Other cost 2.5 x DLC = Rp 375.000.000,-

Cost for remaining 1.500.000 pieces = Rp 1.075.000.000,-

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 DECISION
• Do nothing → Cost: Rp 1.387.500.000,-
• New method → Cost: Rp 1.075.000.000,-

What is the best decision?

Why?

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 ENGINEERING COSTS (1)
• Fixed Costs
→ Constant or unchanging regardless of
the level of output or activity
• Variable Costs
→ Depend on the level of output or
activity

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 ENGINEERING COSTS (2)
• Marginal Costs
→ Variable cost for one more unit
• Average Costs
→ Total cost divided by the number of
units.

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 EXAMPLE (2)
“Maju Mundur” (MM) Travel wanted to charter a bus to take people
from Gunung Kidul to attend Bon Jovi concert in Yogyakarta. MM
Travel planned to provide transportation, concert ticket, and
refreshments on the bus for his customers.

MM Travel costs are:

Bus rental Rp 2.000.000,-
Gas expense Rp 1.000.000,-
Bus driver Rp 500.000,-
Concert ticket Rp 500.000,-/person
Refreshment Rp 50.000,-/person

a. If there are 30 people who want to attend the concert, how much
the minimum price of concert ticket should MM Travel charge?
b. If MM Travel want to sell the concert ticket at Rp 750.000,- per
person, how many people should they gather?
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 SOLUTION
• Fixed Cost:
Bus rental Rp 2.000.000,-
Gas expense Rp 1.000.000,-
Bus driverRp 500.000,-
Total fixed cost Rp 3.500.000,-

• Variable Cost:
Concert ticket Rp 500.000,-/person
Refreshment Rp 50.000,-/person
Total variabel cost Rp 550.000,-/person

Total cost = total fixed cost + total variable cost

= Rp 3.500.000,- + Rp 550.000(P)

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 ALWAYS
REMEMBER !!

Price ≥ Total Cost

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 SOLUTION
a. For 30 people
Total cost = Rp 20.000.000
Minimum price = Total cost / Number of people
= Rp 20.000.000,- / 30
= Rp 666.667,-

b. For ticket price = Rp 750.000,-/person

Ticket price = Total cost
Rp 750.000,- (P) = Rp 3.500.000 + Rp 550.000,- (P)
P = 17.5
Minimum number of people = 18 persons.
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 ENGINEERING COSTS (3)
• Sunk Costs
→ Money already spent as a result of a
past decision
• Opportunity Costs
→ Associated with using a resource in
one activity instead of another.

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 ENGINEERING COSTS (4)
• Recurring Costs
→ Any expense that is known, anticipated,
and occurs at regular intervals.
• Non Recurring Costs
→ One-of-a-kind expenses that occur at
irregular intervals.

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 ENGINEERING COSTS (5)
• Incremental Costs
→ Differences between alternatives.

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 EXAMPLE (3)
John is choosing between model A (budget model) and
model B (with more features). What incremental cost would
John incur if he chose model B instead of the less
expensive model A?
Cost Items Model A Model B
Purchase price Rp 10.000.000,- Rp 17.500.000,-
Installation costs Rp 3.500.000,- Rp 5.000.000,-
Annual
maintenance Rp 2.500.000,- Rp 750.000,-
costs
Annual utility
Rp 1.200.000,- Rp 2.000.000,-
expenses
Disposal costs
Rp 700.000,- Rp 500.000,-
after useful life

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 SOLUTION
Cost Items Model B - Model A Incremental cost
Purchase price (Rp 17.500.000,-) - (Rp 10.000.000,-) Rp 7.500.000,-
Installation costs (Rp 5.000.000,-) - (Rp 3.500.000,-) Rp 1.500.000,-
Annual
(Rp 750.000,-) - (Rp 2.000.000,-) - Rp 1.250.000,-/yr
maintenance costs
Annual utility
(Rp 2.000.000,-) - (Rp 1.200.000,-) Rp 800.000,-/yr
expenses
Disposal costs after
(Rp 500.000,-) - (Rp 700.000,-) - Rp 200.000,-
useful life

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 QUIZ 1 (Monday, 28/9/2015)
• Problems 1.41 & 1.42 (Page 25)
• Read Chapter 3 (Interest and
Equivalence)

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