CHAPTER 17COST EVALUATION

17.1From Eq.(16.19) which adjusts cost for a size or capacity difference,

a cyclone dust collector. Note that while the new unit has 10 times the capacity as the unit purchased in 1985 will not cost 10X more, because of economy of scale. However, the purchase cost will have increased because of inflation in the 22 years since it was purchased in 1985. Assuming cost inflation in of 5% per year, the original cost of $35,000 is now equivalent to.

The estimate of the cost is Note that this estimate does not include the cost of shipping, installation at the plant, and necessary electrical and mechanical auxiliaries. The best estimate of the cost would be a firm quotation from the supplier. A better estimate of the cost escalation from 1985 could be obtained using Eq.(16.18) with the producer price index (PPI) at www.bls.gov for the type of equipment involved, since an estimate of 5% inflation most likely overestimates the actual situation.

17.2Typical costs for the overseas subcontractor and the U.S. shoe company that sells a name brand shoe to a retail chain might be:

Overseas subcontractorLabor per shoe2.75Materials9.00Shipping and import duty3.50Operating cost3.00Profit1.75

U.S. brand name shoe companyPurchase from subcontractor20.00Research and development 0.25Promotion and advertising 4.00Sales, G&A 5.00Profit 6.75

17.3This is an example of a break-even point problem. Soft tooling typically makes the part with standard machines, universal dies and fixtures, and sometimes with tooling made quickly from softer materials like aluminum. A process developed with soft tooling can get under way quickly, making parts with little automation and low tooling cost. However the life of the tools is short and the cost of making a unit part is higher than if more time and money were spent making hard tool steel dies using highly automated manufacturing equipment. Soft tooling works best when the number of parts, Q , is relatively small; hard tooling works best when the quantity of parts needed is large. The objective of this problem is to find the break-even quantity of parts QB below which soft tooling is the way to go, and above which using hard tooling is a better decision. At the break-even point, QB, the cost of using hard tooling equals the cost of using soft tooling. The chief cost elements are: the cost of tooling. CH = $7500 and CS = $600 the cost of tool setup. SH=$60 and SS = $100. Parts are made in batches, b, (lots) of 500 units. the cost to make one part. CpH = $0.80 and CpS = $3.40

At the break-even point

The break-even point gives the total production at which the hard tooling approach becomes more cost effective than soft tooling. Since the total production is 5000 units, the best decision is to use hard tooling if the time required to make to tools and prepare the production machines is compatible with the product development schedule.

The units for the basic equation above are:

17.4Figure 16.1 should serve as a guide for breaking down the costs listed in the problem statement.

Prime cost Direct labor950,000Direct material 2,150,000Direct expenses 60,000Direct engineering 90,000Direct engr. expenses 30,000 3,280,000(1)Factory expensePlant utilities 70,000Plant & equip. depreciation 120,000Warehouse expense 60,000Taxes & insurance 50,000 300,000(2)

General and administrative expenses (G&A)Plant manager and staff180,000Administrative salaries120,000Office utilities 10,000310,000(3)

Manufacturing cost = (1) + (2) +(3) = 3,890,000 (4)

Sales expense = 100,000(5)

Total cost = (4) + (5) = 3,990,000(6) This ignores corporate overhead, which should be small for a company of this size.

The problem states that the profit margin is 0.15 or 15%. One is tempted to multiply the total cost by 0.15 to get the profit, and add this to cost to find the selling price.However, this is not strictly correct. By definition:

But, from Eq.(16.2),

The unit selling price of turbine is

17.5The calculation will be done with unit costs developed by the following equation.

$/lb(Since polymers are made from oil-based feedstock, this price could be at least doubled today.)

per part. The $20 per h includes labor rate plus amortization of mold costs.

This is the manufacturing overhead cost per part.

The corporate general and administrative cost (G&A) Total unit cost = 0.1557 + 0.0234 = $0.1791Selling price = total cost + profit = 0.1791 + 0.1(0.1791) = $0.1970 per unit

Note that in this problem the profit is given as Profit is 10 percent. This implies a percentage of the total cost, as shown above. If the profit was stated as profit margin is 10 percent then the method shown in Problem 16.4 would apply.

17.6The problem asks to determine the cost for melting a pound of high-grade steel by two competitive processes, vacuum arc remelting (VAR) and the electro slag remelting process (ESR). Information on both of these processes can be found in Wikipedia. As worded, the problem asks only for the processing cost, which would be the labor, process expendables ( water, slag, and electricity a major item), as well as manufacturing overhead and deprecation on both the furnaces and the space. It does not include the actual cost of the steel ingots which are purified by remelting in the process. Costs are on an annual basis.

VARESR1. Direct labor (3 shifts per day; 3 x 89,00) $267,000$267,0002. Manufacturing overhead (1.4 x DL) $373,800$373,0003. Power costVAR:0.3 x 1000 x $0,10 =30 $/h; 15x8x50 =6000h/yr$180,000ESR: 0.5 x 1250 x $0.10 =62.5$/h; 6000 h/yr$375,0004. Cooling water$5,500$6,8005. Slag$42,0006. Annual depreciation on furnace$130,000$90,000(straight-line, 10 yr life)7. Depreciation on factory space (25 year life)$1600$1600

Total annual operating cost$957,100$1,155,400

Total annual productionVAR: 1000 lb/h x 6000 h/yr = 6,000,000 lbsESR : 1250 lb/h x 6000 h/yr = 7,500,000 lbs/yr

Melting cost per lb of steel$ 0.1595$0.1540