Engineering Economy Lecture 2 PDF

Higher Technological Institute " H T I " Engineering Engineering Economy Lecture 2 Cost Concepts and Behavior Life cycle cost  Product life-cycle is concerned with covering costs in all categories of the life cycle. Research & Developing  Lif...

Higher Technological Institute " H T I " Engineering Engineering Economy Lecture 2 Cost Concepts and Behavior Life cycle cost  Product life-cycle is concerned with covering costs in all categories of the life cycle. Research & Developing  Life-Cycle Cost include: (A) First Cost 1. Machines 2. Tools 3. Training 4. Installation 5. Tooling and Support Equipment  Life-Cycle Cost include: (B) Operating and Maintenance cost: 1. Material 2. Labor 3. Over head cost required for the system (C) Disposed Costs: The definition of disposal costs is the costs associated with disposing of waste materials. Salvage value = market value – disposed cost What is a Salvage Value (Scrap value)? Salvage value or Scrap Value is the estimated value of an asset after its useful life is over and, therefore, cannot be used for its original purpose. For example, if the machinery of a company has a life of 5 years and at the end of 5 years, its value is only $5000, then $5000 is the salvage value. ‫ ال يمكن‬،‫ وبالتالي‬،‫قيمة اإلنقاذ أو قيمة الخردة هي القيمة المقدرة لألصل بعد انتهاء عمره اإلنتاجي‬ 5 ‫ سنوات وفي نهاية‬5 ‫ إذا كان عمر آلة الشركة‬،‫ على سبيل المثال‬.‫استخدامها لغرضها األصلي‬.‫ دوالر هي قيمة اإلنقاذ‬5000 ‫ فإن‬،‫ دوالر فقط‬5000 ‫ كانت قيمتها‬،‫سنوات‬ Salvage Value Example Let’s take an example to understand this. Let’s say that Treat Inc. has purchased equipment for $100,000. The company found out that the useful life of this equipment is ten years, and at the end of 10 years, the value of the equipment would be $10,000. So the scrap value of the equipment is $10,000. Now, as we know that the value of the equipment is $10,000, the depreciation ‫ استهالك‬for this equipment will be calculated on = ($100,000 – $10,000) = $90,000.  Life-Cycle Cost include: (D) Fixed cost [F.C]: 1. Fixed costs remain unchanged as volume changes within the relevant range. 2. Fixed costs are “fixed” in “total” as activity changes.  Fixed cost [F.C]: Fixed cost refers to those costs incurred by the company during the accounting period under consideration that has to be paid no matter whether there is any production activity or the sale activity in the business or not and the, examples of which include rent payable, salaries payable, interest expenses and other utilities payable. The following example provides an outline of the most common fixed costs. Each example states the topic, the important reasons, and additional comments as needed. Here is the list of the top 11 most common Fixed Costs – #1 – Depreciation #2 – Amortization ‫ – اإلهالك‬1# ‫ – االستهالك‬2# ‫ – التأمين‬3# #3 – Insurance #4 – Rent Paid ‫ – اإليجار‬4# ‫ مصاريف‬- 5# ‫ – الضرائب‬6# #5 – Interest Expense ‫مدفوع‬ ‫الفوائد‬ ‫العقارية‬ #6 – Property Taxes #7 – Salaries ‫ – النفقات‬9# ‫ – مصاريف‬8# #8 – Utility Expenses ‫ – الرواتب‬7# ‫المرافق‬ ‫اإلعالنية‬ ‫والترويجية‬ #9 – Advertising and Promotional Expense #10 – Equipment Rental ‫ – تأجير‬10# ‫ – النفقات‬11# #11 – Legal Expenses ‫المعدات‬ ‫القانونية‬   Life-Cycle Cost include: (E) Variable Costs [V.C]: 1. Costs that change in direct proportion with a change in the volume within the relevant range 2. Variable costs “vary” in “total” as activity changes. 3. Variable cost per unit stays constant when activity changes within the relevant range. Types #1 – Material Costs #2 – Labor and Workforce #3 –Fees, and Commissions #4 – Transportation costs  Let us assume that a company To calculate variable expenses Variable Costs = Cost per unit x Variable Costs = 45 x 18 x 30 = that manufactures 900 linen for 30 days, we apply the given Total number of units $24300 shirts daily. To achieve this, the values to the formula: company appoints 45 laborers and pays each laborer $18 for a day’s work. To complete production, the manufacturer is forced to pay each worker: $40 for a day’s work. That is twice the standard rates. But first, let us compute the total expense. Variable Expense = 40 x 45 x 30 Variable Expense = $54000 The difference between the costs of production between the two months – 54000 – 24300 = $29700 Thus, external factors caused a $29700 change in variable expense for other months (despite outputting the same production levels). ( ‫الربح التشغيلي = إجمالي اإليرادات‬T.R) – ( ‫إجمالي التكاليف‬T.C)  Life-Cycle Cost include: (E) Total costs [T.C]: Total costs Are fixed cost plus variable cost T.C = F.C + V.C(x) Where x: number of items (F) Profit Equation:  Operating profit = Total revenues (T.R) – Total costs(T.C) ( ‫ أجمالي التكاليف‬- ‫الربح التشغيلي = إجمالي اإليرادات‬  Life-Cycle Cost include: (E) Break even point [B.E.P]: Total revenues (T.R) = Total costs(T.C) Operating profit = Zero B.E.P =profit – selling price  E.X(1) Investment company wanted to invest profits in the production of refrigerators were the fixed costs (land, buildings, machines,……….) is 2 million pounds and variable costs of (raw material, paint,……..) is 500 pounds per refrigerator and sail price of one refrigerator is 1000 pounds. Calculate the variable costs of producing 10000 refrigerators per year, total costs, total return, profit, draw the breakeven point and calculate the number of units at this point GIVEN DATA: F.C = 2000000 Pounds U.V.C = 500Pounds S.P = 1000 Pounds N =10000 Required: (A)V.C (B) T.C (C) T.R (D) Profit Solution: (A) V.C = U.V.C *N = 500*10000 = 5000000 Pounds (B) T.C = F.C + V.C = 2000000 + 5000000 = 7000000 Pounds (C) T.R = S.P* N =1000 *10000 =10000000 Pounds (D) Profit = T.R - T.C = 10000000 – 7000000 = 3000000 Pounds N 0 10000 T.R 0 10000000 T.C 2000000 7000000 C T.R T.C N