Cost Analysis and Estimating

for Engineering and Management

Chapter 11
The Enterprise
Entrepreneurship
And “Imaginamachina”

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-1
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Overview
 The Business of New Ideas
-Entrepreneurship
 Designing for Profit
-Top Down Cost Targets
 Designing for Manufacture
 Financing the Enterprise
 Legal and Ethical Issues

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-2
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Changes
 Starting
a New Business
 Big Changes to Existing Business
 Less Than 1% of New Products Succeed
 Only 2% of Patented Ideas Develop
 Competition is Intense
 Need Good Business Planning and
Funding, Along with a Good Idea
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-3
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 The Enterprise

Imaginamachina: ideas and imagination coupled to the engineering

thinking process. This is essential to the enterprise and entrepreneurship
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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-4
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Free Enterprise
 Producers
-Make What They Want (Or Not)
-Charge What They Want
-Compete How They Want
 Customers
-Buy What They Want (Or Not)
-Buy From Whom They Want

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-5
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Business
 Motivated By Profit
 Players Include
-Owners
-Employees
-Customers
-Designers
-manufacturers
 Cannot Succeed By Maintaining the “Status Quo”:
-Cost entropy
-Competitive markets
 Engineering must continually update, create new
products and reduce costs
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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-6
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Launching a Product

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-7
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Marketing
 Identifies a Demand for a Product
 Creates a Demand for a New Product
 New Technologies Emerge and Grow
-Innovation
-Growth
-Standardization
-Maturity
 Need Differing Marketing Approaches
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-8
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Entrepreneurship
 Entrepreneurs
-Supply the Ideas
-Have a Long Term Vision
-Are Flexible and Adaptable
 Successful Companies Must
-Continually Add New Products
-Connect Entrepreneurs with Funding

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-9
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Design for Profit
 Top Down Estimate
-Starts with a Market Price
-Ends with “Target Costs”
 Ensures:
-Product Meets Market Price
-Production Can Meet Cost Targets
-Profit
 Determines Feasibility (Proceed or Kill)
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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-10
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Example

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-11
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Design for Manufacture
 First design is usually not optimal, and “try and try
again” is a slogan
 Smart Designs Reduce Cost
 Large Topic Area
 Lots of Guidelines, Checklists, etc.
 Too Big for This Discussion
 Develop and Compare Design Alternatives
-Satisfies Design and Cost Requirements

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-12
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Alternative Design Comparison
 
Die casting aluminum Investment casting of
alloy and machining titanium alloy
Finish 64 – 125  in. 25 – 64  in
Tolerance  0.002 in.  0.005 in.
Limitations Difficult to fixture, little Expensive pattern tooling
cost saving with lot sizes

Advantages Good for small lot sizes Good accuracy, big cost
decrease for lot size, less
machining
Reliability 1,500,000 cycles 3,250,000 cycles
Hardness Soft Harder in impact
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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-13
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Example of Alternative Costs
Lot Machining Die Die Single part
qty parts from casting casting titanium
aluminum aluminum single casting, bigger
parts aluminum tolerances, no
part machining
 

   
10 $212.62 $463.79

100 93.17 59.63 $57.21 $173.73

500 91.32 57.42 45.93 54.66

The $ 45.93 still above the $ 40 for the wrist and bottom part
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-14
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Make-or-Buy
 FindLeast Cost Source
 Suppliers May Have Lower Cost
-Better Technology
-More Experience
-Better Fit for the Job
 Compare on Same Basis
 Lowest Price Is Not Always Lowest Cost

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-15
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Cost to Buy
 In Addition to Quoted Price
-Transportation Costs
-Purchasing and Order Management Cost
-Receiving Costs
-Incoming Inspection Cost

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-16
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Intangibles with Buying
 Schedule Control
 Quality
 Visibility into Status

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-17
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Considerations for Make
 Capability – Does the Company Have:
-The Technology
-The Skills
-The Capacity
 Capacity
-Shop Load (Plant Utilization)
-Affects Cost Determination

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-18
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Costs Based on Utilization
 
Plant Utilization
Cost items Less than Greater than 100%
100%
Direct labor Include Include
Direct material Include Include
Variable overhead Include Include
Fixed overhead Omit Include
Marginal cost Include Include
Sunk cost Omit Omit
Profit Omit Management choice

See example on Table 11.4 page 515

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-19
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Enterprise Plan
 Some times called “prospectus” (latin, meaning
distant view):
- The objective is that planning for both technical and cost
are done
- Important for the enterprise and investor
- The intent is to provide and overview of information for
investors, bankers, and interested individual
 Content:
- Executive Summary
- Objectives and Potential
- Product and Processes Descriptions
- Keys to Success
- Market Analysis
- Income and Cost Analysis
- Assessment
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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-20
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Example Cost Chart

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-21
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Example Financial Chart

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-22
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Assessment
An enterprise plan may conclude with the cost analysis and leave
Questions about any systematic evaluation to the investor.
The investor evaluation is sometimes referred to as DUE DILLIGENCE
Economic Evaluation Criteria for Enterprise Plans
 
Affordability and total cost
Percent profit on investment
Percent profit on sales
Annual cost of production of the product
Unit cost to produce and sell
Unit cost to produce and sell, including profit and taxes

Payout period and return on investment

Amount and time strategy for liquidation
Other “yield” calculations on investment
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-23
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Entrepreneur’s Challenge
 Must Understand the Project and Plan
Completely
 Consider and Address Potential
Questions
 Thoroughly Review the Plan
 Be Able to Answer Any and All Questions

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-24
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Funding the Enterprise
 Personal Resources
 Existing Company Resources
 Private Investors
 Public Funding
-Stocks
-Bonds
-Debt (Loans)
-Alliances
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-25
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Stocks
 Small Units of Ownership
 Benefit for investor:
- Stock Price Appreciation (Share of Growth, share price
rise)
- Dividends (Share of Profits)
 No Guarantees
- May Loose Investment

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-26
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Stock Terms
 Market Capitalization
-Share Price x Number of Shares
 Price Earnings Ratio
-Stock Price  per Share Earnings
 Preferred Stock
-Specified Dividend Rate
-Preference Over Common Stock
 If a company declares bankruptcy and ceases
operation, common stockholders are generally
last to receive anything

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-27
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Debt (Loans)
 Specified Repayment Amounts and Times
 Requires Interest Payments
-Credit Rating Affects Interest Rate
-Interest Is Tax Deductible Expense
 Long term loan has a period in excess of a year.

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-28
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Bonds
 Stock Is Expensive and Continues
Indefinitely
 Bonds Are Limited Life
 Borrowing from Investors
 Fixed Income Stream (Interest)
 Principal Repaid at End of Term

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-29
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Bond Interest
 Called Coupon Rate
 Based on U.S Treasury 30-Year Bonds
 Credit Rating Determines Margin
 Margin
-Rate Above Treasury Rate
 High Interest Rates Makes Capital
Expensive
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-30
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Bond Terms
 Face Value (Par)
-Amount to Be Paid at Maturity
 Coupon Rate
-Sets Magnitude of Interest Payments
 Yield
-Coupon Rate  Price

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-31
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Bond Values
 Sale Price Is Approximately the Par
Value
 Present Value
-Sum of Remaining Interest Payments
-Plus the Amount Paid at Maturity
-All Discounted at a Required Interest Rate
P0  I ( P / A, i b , n)  M ( P / F , i b , n) Eq 11.1
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-32
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Bond Trading
 Bonds Can Be Traded on the Market
 Sales Price Depends on Current Interest
Rates
 Original Purchase Price Means Nothing
 Higher Current Interest Rates Lower the
Bond Price

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-33
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Alliances
 Joining with Another Company or
Individual
 Limited Partnership
 Joint Venture
 Venture Capital

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-34
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Seeking Alliances
 Offering
-Develop an Enterprise Plan
-Present to Interested Parties
-Assessment and Due Diligence
-Negotiation and Closing

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-35
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Types of Enterprise
 Sole Proprietorship
 Partnership
-Any Partner Can Make Commitments for
the Business
 Corporation
-Legal Entity
-Limits Liability to Investment Only

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-36
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Ethics and Engineering
 Expectation of Highest Standards of
Honesty and Integrity
 Dedication to Protecting the Public
 Maintain Objectivity in Fact Finding
and Cost Analysis
 Maintain Trust and Fairness

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Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-37
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Summary

 Entrepreneurship and the Enterprise

 How to Design for Cost and Profit
 How to Fund the Enterprise
 Legal Structure of the Enterprise
 Importance of Ethics

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ch 11-38
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management