1. Economics of Process Selection

2. Outline Economics of Process Selection Cost Factors
Fixed vs. Variable costs
Direct vs. Indirect costs

3. Can be attributed to the creation of specific product
Manufacturing Cost
Can be attributed to the creation of specific product
Often called overhead
Direct Cost
Indirect Cost
Varies with volume
Does not vary with volume
Fixed
Variable
Labor
Preventative maintenance, salaried support
Reactive maintenance, hourly support
Material
Rent
Utilities
Fixed
Variable
Fixed
Variable
Labor
Salaried operator
Hourly operator
Material
Material for the product
Tooling
Setup
Labor costs, for example, can be indirect, as in the case of maintenance personnel and executive officers; or they can be direct, as in the case of project staff members. Similarly, materials such as miscellaneous supplies purchased in bulk—pencils, pens, paper—are typically handled as indirect costs, while materials required for specific projects are charged as direct costs. – Wikipedia
Direct labor are those workers on the production line whose efforts directly produce what the factory manufactures. All other workers are classified as indirect workers. -

4. Process Cost Comparison
Process Chain A
Process Chain B
Tooling
Material
Setup (could be multiple processes)
Direct labor (could be multiple processes)
Other (utilities, special inspection)
Per Unit Cost
Given:
Production quantity (quantity per time)
Lot or batch size (setup needed per batch)
Process chains A and B produce functional comparable parts. Compare their per unit costs at a given production volume to compare associated economics.

5. Process Cost Comparison – Break-even
Process B
$/unit
Process A
$/unit
Total Cost
Start up cost per process (tooling, equipment, fixtures, etc.)
Break-even
Number of Units Produced

6. Practice Problem – Evaluating Alternatives
Assume that for a given part the tooling cost is $8,000 and the material cost per part is $3.25 for manufacturing process 1. For manufacturing process 2, the tooling cost is $50,000 and the material cost per part is $2.30. At what production volume does manufacturing process 2 become attractive?
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7. Practice Problem – Evaluating Alternatives
When investigating methods to produce a part you compared Gray Iron casting with Aluminum Die casting. The investigation revealed a fixed cost for the Grey Iron method of about $5,000 and about $35,000 for the Die casting. The variable part cost for Gray Iron was $2.26 and was $1.98 for Die Casting.
What is the break even production volume?
If we were planning on making more parts than break even, which method would be preferred?
How many more parts would you need to make to save your own cost to the company (Assume that you worked on this problem for 1 week at $300/day)?
Your salary as an engineer is a fixed or variable cost?
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