Engineering Economics

2-0
Topics divided into two sections;
a. Engineering Management
b. Engineering Economics
Management
• Management is a set of principles relating to the functions of planning,
organizing , directing and controlling the application of these principles
in harnessing physical, financial ,human and informational resources
effectively and efficiently to achieve organizational goals.
• The functions of Management are;
a. Planning
b. Organizing
c. Directing
d. Controlling
• Planning: setting goals and establishing a plan to achieve them.
• Organizing : Establishing a structure for the organization and
individual job within it.
• Directing: Directing and Motivating employees to achieve
organizational goals and objectives.
• Controlling: Measuring performance and making necessary
adjustments as needed.
The Hierarchy of Management
a. Top Level Managers
b. Middle level managers
c. First line Managers
d. Team leaders
a. Top Level Managers
egs; CEO,CFO,CMO,COO. They are responsible to develop mission and
vision for the organization.
b. Middle Managers
-Intermediary between top and first line managers.
- Branch managers, line managers, plant managers and regional managers
- Pursue goals and objectives established by top level managers
- -Allocate resource
• First line Managers: responsible for supervising performance at
employees directly involved in producing goods or offering services
• Departmental Managers ,office managers
• Oversee performance of entry level workers

Team Managers facilitate team activities , managing internal and

external relationship.
Not accountable for team performance
 ORGANIZATION
• ORGANISATION A group of people, supported by a collection of
physical resources and procedures, who work together toward a
common goal; for example. A sporting club, business, government
department, professional body. The function of the organisation
relates to its core business. i.e. to sell goods or to provide a particular
service to a group of people. 
PROFIT-BASED ORGANIZATIONS
• These are commonly referred to as businesses. Although they have a
range of goals, their prime purpose is to make a profit. A business that
cannot achieve this goal will eventually cease operating. $ 
NOT-FOR-PROFIT ORGANISATIONS
• NOT-FOR-PROFIT ORGANISATIONS The prime purpose for a not-for –
profit organisation is non-financial. They often deal with consumer
products, usually in the form of services rather than goods. Examples
of this type of organisation include government departments, schools,
hospitals, charities, political parties, churches, unions and sporting
clubs
• VISION:
• A VISION STATEMENT IS THE COMPANY’S ROAD MAP INDICATING
WHAT THE COMPANY WANTS TO BECOME BY SETTING DEFINED
DIRECTION FOR COMPANY’S GROWTH.
• VISION:
• To evolve NUST into a world class Centre of Excellence among Higher
Education Institutions, leading the transformation of Pakistan towards a
rapidly developing Knowledge Economy to realize the national objective
of a progressive and prosperous country among comity of nations.
​
• A mission statement is a short statement of why organization exists ,
what it creates , what’s its overall goal is and identifying the goals of
its operations.
• A mission statement consists of;
a. Key market : the target audience
b. Contribution: The product or service
c. Distinction: what makes the product unique or why the audience
should buy it.
• MISSION
• In pursuance of NUST vision, strive to achieve following mission goals:
• Develop NUST as a Comprehensive, Academic and Research-led university with a focus on Creativity,
Innovation and Entrepreneurship so as to amicably negotiate Social, Economic and Environmental challenges
faced by the country.
• With foundations based on principles of Merit, Transparency and Fair Play, nurture talent by providing equal
opportunity to all segments of polity.
• Empower students to develop their full potential, acquiring leadership and social skills, to act as agents of
change within the society.
• Improve global visibility by enhancing mutually beneficial linkages with international organisations and partner
universities.
• Strengthen NUST financially to enable the university to achieve its goals by raising awareness among local and
international Pakistani diaspora including Alumni base around the world.
• Ensure conducive learning and working environment for students and staff at par with international standards.​
• Goals: Organizations exist to achieve a goal or a set of goals. Most
organizations share common goals which include: The desire to
maximize profits And emphasis on effectiveness and efficiency of a
product 
• These goals are achieved by breaking them down into more
achievable smaller tasks. These are known as objectives. For
example… To increase growth of book sales by targeting the
appropriate market segment in the local suburb. 
• Strategies: is an organization’s action plan to achieve the mission.
Engineering Management
• Engineering Management is a specialized form of
management that is concerned with the application
engineering principles to business practice.
• Areas of Engineering Management
a. Operation Research
b. Supply Chain Management
c. Operations Management
Functions of an organization
• Major Functions of an
organization;
a. Marketing: which generates the
demand or atleast takes the
order of product or services
b. Production/operation; which
creates the product
c. Finance/ Accounting ; which
tracks how well the
organization is doing.
Operation Management
• Operations management is an area of management concerned with
designing and controlling the process of production and redesigning 
business operations in the production of goods or services. It involves
the responsibility of ensuring that business operations are efficient in
terms of using as few resources as needed and effective in terms of
meeting customer requirements.
• Operations management is primarily concerned with planning,
organizing and supervising in the contexts of production,
manufacturing or the provision of services
Manufacturers vs Service Organizations
Services:
Manufacturers
• Intangible product • Tangible product
• Product cannot be inventoried • Product is inventoried
• High customer contact • Low customer contact
• Short response time • Longer response time
• Labor intensive • Capital intensive
Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

Figure 1.4
Productivity

Units produced
Productivity =
Input used

 Measure of process improvement

 Represents output relative to input
 Only through productivity increases
can our standard of living improve
 Productivity Calculations

Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

 Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
 Also known as total factor productivity
 Output and inputs are often expressed in
dollars

Multiple resource inputs  multi-factor productivity

NUMERICAL
• Collins Title wants to evaluate its labor and multi factor productivity
with a new computerized title search system. The company has a staff
of four each working for eight hours per day( for a payroll cost of $
640 per day) and overhead expenses of 400$ per day. Collins
processes and closes on 8 titles per day. The new system will show the
processing of 14 titles per day. The overhead expenses now are 800 $
per day. Calculate the labor productivity and multifactor productivity.
Productivity Variables
 Labor - contributes
about 10% of the annual
increase
 Capital - contributes
about 38% of the annual
increase
 Management -
contributes about 52%
of the annual increase
Break-Even Analysis
► Technique for evaluating process and
equipment alternatives
► Objective is to find the point in dollars
and units at which cost equals
revenue
► Requires estimation of fixed costs,
variable costs, and revenue
Break-Even Analysis
► Fixed costs are costs that continue even
if no units are produced
► Depreciation, taxes, debt, mortgage
payments
► Variable costs are costs that vary with
the volume of units produced
► Labor, materials, portion of utilities
► Contribution is the difference between
selling price and variable cost
Break-Even Analysis
► Revenue function begins at the origin
and proceeds upward to the right,
increasing by the selling price of each
unit
► Where the revenue function crosses
the total cost line is the break-even
point
Break-Even Analysis
–
Total revenue line
900 –

800 – i d or
Break-even point rr Total cost line
t co
700 – Total cost = Total revenue
rofi
Cost in dollars P
600 –

500 –
Variable cost
400 –

300 –
o ss or
200 – L rid
r
co
100 – Fixed cost
| | | | | | | | | | | |
–
0 100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)
Break-Even Analysis
Assumptions
► Costs and revenue are linear

functions
► Generally not the case in the real
world
► We actually know these costs
► Very difficult to verify
► Time value of money is often
ignored
Break-Even Analysis
BEPx = break- x = number of units
even point in produced
units TR = total revenue =
BEP$ = break- Px
even point in F = fixed costs
dollars V = variable cost
P = price per per unit
unit point
Break-even (after all
occurs when TC = total costs = F
discounts) + Vx
TR = TC F
or BEPx =
P–V
Px = F + Vx
Break-Even Analysis
BEPx = break- x = number of units
even point in produced
units TR = total revenue =
BEP$ = break- Px
even point in F = fixed costs
dollars V = variable cost
P = price per per unit
unit P(after F Profit
all = TRTC = total costs = F
- TC
BEP$ = BEP = P
discounts)P – V
x
= Px +– Vx
(F + Vx)
F
= (P – V)/P = Px – F – Vx
= (P - V)x – F
F
= 1 – V/P
 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)
Break-Even Example
50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 – costs
Dollars

20,000 –

Fixed costs
10,000 –

| | | | | |
0– 2,000 4,000 6,000 8,000 10,000
Units
Questions
• An electronics firm is currently manufacturing an item that has a
variable costs of $ 0.50 per unit and a selling price of $ 1.00 per unit .
Fixed costs are $ 14,000 . Current volume is 30,000 units. The firm
can substation ally improve the product quality by adding a new piece
of equipment at an additional fixed cost of 6,000 $. The variable cost
would increase to 0.60 $ but volume should jump to 50,000 units.
Should the company buy the new equipment.