Ch 11-1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Cost Analysis and Estimating for Engineering and Management Chapter 11 The Enterprise Entrepreneurship And “Imaginamachina”

Ch 11-2 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Overview l The Business of New Ideas  Entrepreneurship l Designing for Profit  Top Down Cost Targets l Designing for Manufacture l Financing the Enterprise l Legal and Ethical Issues

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

Ch 11-4 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management The Enterprise

Ch 11-5 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Free Enterprise l Producers  Make What They Want (Or Not)  Charge What They Want  Compete How They Want l Customers  Buy What They Want (Or Not)  Buy From Whom They Want

Ch 11-6 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Business l Motivated By Profit l Players Include  Owners  Employees  Customers l Cannot Succeed By Maintaining the “Status Quo”

Ch 11-7 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Launching a Product

Ch 11-8 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Marketing l Identifies a Demand for a Product l Creates a Demand for a New Product l New Technologies Emerge and Grow  Innovation  Growth  Standardization  Maturity l Need Differing Marketing Approaches

Ch 11-9 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Entrepreneurship l Entrepreneurs  Supply the Ideas  Have a Long Term Vision  Are Flexible and Adaptable l Successful Companies Must  Continually Add New Products  Connect Entrepreneurs with Funding

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Design for Profit l Top Down Estimate  Starts with a Market Price  Ends with “Target Costs” l Ensures:  Product Meets Market Price  Production Can Meet Cost Targets  Profit l Determines Feasibility (Proceed or Kill)

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Example

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Design for Manufacture l Smart Designs Reduce Cost l Large Topic Area l Lots of Guidelines, Checklists, etc. l Too Big for This Discussion l Develop and Compare Design Alternatives  Satisfies Design and Cost Requirements

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Alternative Design Comparison Die casting aluminum alloy and machining Investment casting of titanium alloy Finish 64 – 125  in.25 – 64  in Tolerance  in.  in. LimitationsDifficult to fixture, little cost saving with lot sizes Expensive pattern tooling AdvantagesGood for small lot sizesGood accuracy, big cost decrease for lot size, less machining Reliability1,500,000 cycles3,250,000 cycles HardnessSoftHarder in impact

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Example of Alternative Costs Lot qty Machining parts from aluminum Die casting aluminum parts Die casting single aluminum part Single part titanium casting, bigger tolerances, no machining 10$212.62$ $57.21$

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Make-or-Buy l Find Least Cost Source l Suppliers May Have Lower Cost  Better Technology  More Experience  Better Fit for the Job l Compare on Same Basis l Lowest Price Is Not Always Lowest Cost

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Cost to Buy l In Addition to Quoted Price  Transportation Costs  Purchasing and Order Management Cost  Receiving Costs  Incoming Inspection Cost

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Intangibles with Buying l Schedule Control l Quality l Visibility into Status

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Considerations for Make l Capability – Does the Company Have:  The Technology  The Skills  The Capacity l Capacity  Shop Load (Plant Utilization)  Affects Cost Determination

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Costs Based on Utilization Plant Utilization Cost itemsLess than 100% Greater than 100% Direct labor Include Direct materialInclude Variable overheadInclude Fixed overheadOmitInclude Marginal costInclude Sunk costOmit ProfitOmitManagement choice

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Enterprise Plan l Executive Summary l Objectives and Potential l Product and Processes Descriptions l Keys to Success l Market Analysis l Income and Cost Analysis l Assessment

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Example Cost Chart

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Example Financial Chart

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Assessment 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

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Entrepreneur’s Challenge l Must Understand the Project and Plan Completely l Consider and Address Potential Questions l Thoroughly Review the Plan l Be Able to Answer Any and All Questions

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Funding the Enterprise l Personal Resources l Existing Company Resources l Private Investors l Public Funding  Stocks  Bonds  Debt (Loans)  Alliances

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Stocks l Small Units of Ownership l Stock Price Appreciation (Share of Growth) l Dividends (Share of Profits) l No Guarantees  May Loose Investment

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Stock Terms l Market Capitalization  Share Price x Number of Shares l Price Earnings Ratio  Stock Price  per Share Earnings l Preferred Stock  Specified Dividend Rate  Preference Over Common Stock

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Debt (Loans) l Specified Repayment Amounts and Times l Requires Interest Payments  Credit Rating Affects Interest Rate  Interest Is Tax Deductible Expense

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Bonds l Stock Is Expensive and Continues Indefinitely l Bonds Are Limited Life l Borrowing from Investors l Fixed Income Stream (Interest) l Principal Repaid at End of Term

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Bond Interest l Called Coupon Rate l Based on U.S Treasury 30-Year Bonds l Credit Rating Determines Margin l Margin  Rate Above Treasury Rate l High Interest Rates Makes Capital Expensive

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Bond Terms l Face Value (Par)  Amount to Be Paid at Maturity l Coupon Rate  Sets Magnitude of Interest Payments l Yield  Coupon Rate  Price

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Bond Values l Sale Price Is Approximately the Par Value l Present Value  Sum of Remaining Interest Payments  Plus the Amount Paid at Maturity  All Discounted at a Required Interest Rate Eq 11.1

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Bond Trading l Bonds Can Be Traded on the Market l Sales Price Depends on Current Interest Rates l Original Purchase Price Means Nothing l Higher Current Interest Rates Lower the Bond Price

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Alliances l Joining with Another Company or Individual l Limited Partnership l Joint Venture l Venture Capital

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Seeking Alliances l Offering  Develop an Enterprise Plan  Present to Interested Parties  Assessment and Due Diligence  Negotiation and Closing

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Types of Enterprise l Sole Proprietorship l Partnership  Any Partner Can Make Commitments for the Business l Corporation  Legal Entity  Limits Liability to Investment Only

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ethics and Engineering l Expectation of Highest Standards of Honesty and Integrity l Dedication to Protecting the Public l Maintain Objectivity in Fact Finding and Cost Analysis l Maintain Trust and Fairness

Ch © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Summary l Entrepreneurship and the Enterprise l How to Design for Cost and Profit l How to Fund the Enterprise l Legal Structure of the Enterprise l Importance of Ethics