1. 1 The George Washington University School of Engineering & Applied Science Department of Electrical & Computer Engineering Engineering Economic Analysis Cost Estimation ECE-157 - Fall 2006 Prof. T. J. Manuccia

2. 2 Economic Analysis The economic analysis of an engineering project can be performed in numerous ways. For ECE 156-7-8, we want you to estimate: –Cost to develop one or more prototypes –Cost for the production of a specified number of units –Packaging costs –Distribution costs –Estimated wholesale price (per unit only) –Estimated retail price (per unit only) The first four costs above can be expressed as either: Total, i.e., the total cost for all units produced Per unit, i.e., total divided by the number of units produced.

3. 3 Labor Costs Impact All Phases of Product Development Technical personnel are needed for the development of the prototype. They fall in different labor categories with different salaries: Project Manager : $66/hr ( $132k /yr) Design Engineer : $57/hr ( $114k /yr) Hardware Engineer : $48/hr ( $ 96k /yr) Software Engineer : $40/hr ( $ 80k /yr) Test Engineer : $36/hr ( $ 72k /yr) Technical Writer : $30/hr ( $ 60k /yr) For simplicity in this classroom setting, we will explicitly consider ONLY the above labor categories in development of the prototype. You will assume each of the above rolls as you work on your own project.

4. 4 Salaries & Other Direct Costs Need To Be “Loaded” To Be Converted to “Cost to the Contract ” (p.1) Indirect costs: Fringe benefits – Services or benefits provided to employees –Health Insurance, Payroll Taxes, Pension Contribution, Paid Absences, etc Overhead – Costs associated with the performance of a project –Facility Costs (rent, heat, electricity, etc.) –General Laboratory Supplies, etc. G&A - Costs associated with the overall management / administration of an organization –Office supplies and equipment »PC’s, Xexoxes, Fax machines, paper, etc. –Staff not directly charging to projects »Secretaries, top management & marketing personnel, etc. Fee (i.e., built-in profit margin) Cost of money (i.e., if money is borrowed to solve short term cash flow problems at the start of a project). Estimated annual inflation on multi-year projects

5. 5 Salaries & Other Direct Costs Need To Be “Loaded” To Be Converted to “Cost to the Contract ” (p.2) For the purpose of this class we will approximate the actual conversion from salary to contract charges by a single multiplier factor of 2.8. Example: An employee with a $100/hr salary would charge the contract $280/hr “The multiplier” ranges from ~2.0 to 3.3 in industry with higher numbers typically found in high tech or top-heavy consulting firms, lower numbers in production facilities. “The multiplier” is considerably lower in academia, but one must be careful since the details of how different direct costs are loaded can be different from the commercial sector.

6. 6 Prototype Cost Calculate time and salary for each of the various labor categories –3 Technical writers at $30/hour times 10 hours = $900 –1 SW engineer at $40/hr times 100 hours = $4000 Create totals for hours and for total salary –Total hours = 130 –Total salary = $4900 Multiple your salary total by 2.8 to calculate how much these individuals will cost the contract –Labor charged to contract = $13,720 Add the cost of all parts and external services needed to produce the final, pre-manufacturing prototype –Parts total = $1000 –Machine shop, PCB fabrication and population = $2000 –Total = $3000 Add to this a 5% pass-through fee –5% of $3000 = $150 Add all of the above to calculate your prototype cost –Cost of labor = $13,720 –Cost of parts & external services = $3,150 Prototype cost = $16,870 IMPORTANT: In your deliverables & homework, present the your data and analogous computations in tabular form and show subtotals. Note that the cost computation method outlined above is slightly different from that used in previous years.

7. 7 Production Costs - Labor (p.1) Note the different labor categories, salaries, and “multiplier” in a production environment versus in an engineering / development operation. Manufacturing Process Development and Verification: Estimate total time, then multiple by a salary of $20/hr –Example: 100 hours mfg verification X $20/hr = $2000 Software Testing : Estimate total time, then multiply by a salary of $15/hr –Example: 300 hours SW verification X $15/hr = $4500 Use a multiplier of 2.0 for the above labor categories. –Example: Production labor cost = $6500 X 2.0 = $13,000

8. 8 Production Costs – Non-labor (p.2 - continued) Add the cost of parts in an appropriate quantity (eg, 1,000 units) for full scale production. –Example: Parts = $10/unit x 1,000 units = $10,000 –Note: Parts ordered in large quantities will be less expensive. Estimate the costs of (a) printing the necessary documentation and (b) packaging for distribution. –Example: Printing & Packaging = $1/unit x 1000 units = $1000 –Note: $1/unit is intentionally wrong – It’s just a placeholder. –I want students to provide me with a better estimate of this number, & explain why theirs is better. Sum the labor and non-labor production costs (above) Add overhead costs of 40%, and then a profit (fee) of 20% –Example: ($13,000 + $10,000 + $1,000) x 1.4 x 1.2 = $40,320 Express the cost of production in $ per unit. – Example: $40,320 / 1000 = $40.32 / unit

9. 9 Estimation of Total Cost of The Project Add together the cost of the prototype to the cost of production for the stated number of units to obtain the total cost of the project –Example: $16,870 + $40,320 = $57,190 Also express the total cost of the project in dollars per unit –Example: $57,190 / 1000 = $57.19 / unit

10. 10 Estimation of Minimum Wholesale and Retail Prices The High Cost of Distribution Start with total product cost per unit –Example: $57.19 / unit Add 20% for wholesaler –Example: Wholesale price = $57.19 x 1.2 = $68.62 / unit Add 50% for Retailer –Example: Retail price = $68.62 x 1.5 = $102.94 / unit Note – The retail price is ~ 10x the price of parts!!!