1. Ch 9-1 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Cost Analysis and Estimating for Engineering and Management Chapter 9 Cost Analysis

2. Ch 9-2 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Overview l Making Decisions (Tradeoffs) l Cash Flow Effects l Variations on Breakeven Analysis l Marginal Costs, Revenues, Profits l Life Cycle Costs

3. Ch 9-3 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Tradeoffs l Between/Among Design Alternatives l Proceed or Terminate l Make or Buy l Current or Proposed Product/Method l Often Before or During Design

4. Ch 9-4 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Product Development

5. Ch 9-5 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Tradeoff Study l Search for Alternatives l Determine Cost Estimates l Use Comparative Economy l Consider Constraints l Understand Irreducible Factors l Make Decisions

6. Ch 9-6 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Considering Cash Flow l Amount and Timing of Cash  Coming In, From Sales  Going Out, In Expenses l Also  Depreciation  Taxes  Inflation/Deflation

7. Ch 9-7 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Taxation Effects on Cash Flow l Property Taxes  Fixed, Comparatively Small l Sales Taxes  Part of Material/Equipment Cost l Income Taxes  Federal and Sometimes State

8. Ch 9-8 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Income Taxes l Proportion of Gross Income l Net Income:  What’s Left After Taxes Paid Eq 9.1

9. Ch 9-9 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Graduated Tax Schedule If Income is Between and The tax is of the Amount Over $ 0$50,00015%0 50,00075,000$ 7,500 + 25%50,000 75,000100,00013,750 + 34%75,000 100,000335,00022,500 + 39%100,000 335,00010,000,000113,900 + 34%335,000 10,000,00015,000,0003,400,000 + 35%10,000,000 15,000,00018,333,3335,150,000 + 38%15,000,000 18,333,333….6,416,667 + 35%0

10. Ch 9-10 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Inflation/Deflation l “Value” of Dollar Changes  Purchasing Power  Quantized Through Indices l For Comparisons Over Long Times Eq 9.3

11. Ch 9-11 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Calculating Cash Flow l Usually for Annual Basis l Only for Top/High Level l Mathematically: Eq 9.4

12. Ch 9-12 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Breakeven l How Many Must Be Sold to Recover Costs l Relationship  Cost  Price  Volume  Profit

13. Ch 9-13 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Linear Cost Case l Fixed Cost Is Constant for Period  Does Not Change with Quantity l Variable Cost Is Linear  Constant per Unit Cost  No Production, No Variable Cost

14. Ch 9-14 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Calculations l Total Cost l Cost per Unit l Total Revenue Eq 9.6 Eq 9.7 Eq 9.8

15. Ch 9-15 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Breakeven Point l For Linear Variable Cost l Higher Quantities Reduce Fixed Cost per Unit Eq 9.9

16. Ch 9-16 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Breakeven Chart

17. Ch 9-17 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Per Unit Chart

18. Ch 9-18 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Linear Comparisons l Breakeven Process Can Be Used to Compare Alternatives  Between Two Processes (Isocost Point)  Make-or-Buy  Reducing Material Costs  Tax Effects

19. Ch 9-19 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Process Comparison

20. Ch 9-20 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Make or Buy

21. Ch 9-21 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Material Cost Reduction

22. Ch 9-22 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Tax Effects

23. Ch 9-23 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Semi-Fixed Costs l Cost Changes In Steps l Changes Infrequent During Scope l Examples  Add Another Shift  Add Another Machine/Line l Total Cost Eq 9.10

24. Ch 9-24 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Semi-Fixed Cost Chart

25. Ch 9-25 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Semi-Fixed per Unit Chart

26. Ch 9-26 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Nonlinear Cost l Per Unit Variable Cost Is Not Constant l Per Unit Revenue May Also Vary l Add Nonlinear Variable and Fixed Costs l Divide By Number of Units to Get Average Unit Cost

27. Ch 9-27 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Cost Schedule UnitsCfCf nC v CTCT C T /n 0$4,000 14,000$8004,800$4,800 24,0001,1205,1202,560 34,0001,3405,3401,780 44,0001,6005,6001,400 54,0001,9005,9001,180 64,0002,5206,5201,087 74,0003,5207,5201,074 84,0004,8008,8001,100

28. Ch 9-28 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Marginal Cost, Revenue, Profit l Associated with an Additional Unit of Production l Can Be Nonlinear Marginal Cost =  C T /  n Marginal Revenue =  R T /  n Marginal Profit =  R T /  n -  C T /  n

29. Ch 9-29 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Product Analysis n Marginal Cost Marginal Revenue Marginal Profit 0 1$800$2,000$1,200 23202,0001,680 32202,0001,780 42601,8001,540 53001,5001,200 66201,200580 71,0001,100100 81,2801,100(180)

30. Ch 9-30 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Total Revenue and Cost

31. Ch 9-31 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Marginal Plots

32. Ch 9-32 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Revised Breakeven Analysis l Find Linear Approximation for Revenue Data  Regression Analysis l Breakeven Eq 9.11 Eq 9.13

33. Ch 9-33 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Linear Breakeven

34. Ch 9-34 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Higher Order Solutions l To Fit Some Data Higher Order Polynomial Regression Is Needed l Marginal Cost/Revenue Determined Using Derivation of Regressed Models Eq 9.14 Eq 9.15

35. Ch 9-35 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Nonlinear Cost & Revenue

36. Ch 9-36 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Marginal Plots

37. Ch 9-37 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Consequences l Minimum & Maximum Production Limits  Marginal Profit = Zero l Optimum  Sales Revenue, Production Cost, Profit  But Not All at the Same Point Eq 9.17

38. Ch 9-38 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Life Cycle Cost l Considers Costs for Entire Life  Production / Acquisition  Operation  Maintenance / Upkeep  Salvage Value / Disposal  Recycling l Sum of All Costs from Concept Forward

39. Ch 9-39 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management LCC Use l Used for Comparing Alternatives l Initial Cost and Operating /Use Cost l For Example  High Cost, Reliable Item  Low Cost, More Repair / Replacement  Pay Now or Pay Later

40. Ch 9-40 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Estimates Required for LCC l Design l Capital Investment l Operation, Maintenance, Use l Replacement l Upgrading l Salvage

41. Ch 9-41 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Phases of Project Life

42. Ch 9-42 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management End of Life l Worn Out  Ceases Function l Loss of Profit  Costs Too Much to Continue Operation l Obsolete  Purpose No Longer Exists  Superior Replacement Available

43. Ch 9-43 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Operating & Maintenance Costs l Need  Operating Profile  Maintenance Schedule  Repair Data l Scheduled Maintenance (Preventative) Eq 9.18

44. Ch 9-44 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Breakdown Costs l Mean Time Between Failure (MTBF) l Mean Time to Repair (MTTR) Eq 9.19

45. Ch 9-45 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management LCC Comparison

46. Ch 9-46 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Long Life Costs l Life in Multiple Years l Interest Rate Considerations  Time Value of Money  $1 in 5 Years Is Worth Less Today l Impacts LCC Calculations l Covered In Chapter 10

47. Ch 9-47 © 2004 Pearson Education, Inc. Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Summary l Methods for Making Tradeoff Decisions l Considerations Involving Cash Flow l More Complicated Breakeven Models l Marginal Costs, etc. l Limits on Production l Costs for Entire Life Cycle