Engineering Costs and Cost Estimating. Cost Indices Estimating Benefits Cash Flow Diagrams. Costs: Fixed and Variable Direct and Indirect Marginal and Average Sunk and Opportunity Recurring and Non-Recurring Incremental Cash and Book Life-Cycle.
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Cash Flow Diagrams
Fixed and Variable
Direct and Indirect
Marginal and Average
Sunk and Opportunity
Recurring and Non-Recurring
Cash and Book
are constant and unchanging regardless of the level of the activity over a feasible range of operations for the capacity or capability available.
operating costs that vary in total with the quantity of output or other measures of activity level.
cost that can be reasonably measured and allocated to a specific output or work activity.
cost that it is difficult to attribute or allocate to a specific output or work activity.
Example 2-1. Albert’s Charter Bus Venture
Albert plans to charter a bus to take people to see a wrestling match show in Jacksonville. His wealthy uncle will reimburse him for his personal time, so his time cost can be ignored.
Item Cost Item Cost
Bus Rental $80 Ticket $12.50
Gas Expense $75 Refreshments $ 7.50
Other Fuel Costs $20
Bus Driver $50
Total Costs $225.00 Total Costs $20.00
Graph of Total Cost Equation:
marginal cost(marginal tax)
-The cost to take one more person
- Average cost: the cost per person
Avg. Cost = TC/n
Avg. Cost = ($225+$20n)/n
Avg. Cost = $885/30 = $29.50
Total cost cannot be calculated
from an average cost value
For n =35, TC 35*($29.50) = $ 1,032.50
Suppose Albert’s ticket cost drops to $10 per person if he brings 20 or more people. What is the total cost equation? What is the total cost if number of people exceeds capacity of 1 bus (bus capacity= 40)? What is the marginal cost in this case?
Question: Do we have enough information yet to decide how much money Albert will make on his venture? What else must we know?
Total profit =
Total Revenue – Total Cost:
35n – (225 + 20n) = 15n – 225
How many people does
Albert need to break even?
(not lose money on his venture)
Solve 15 n – 225 = 0 => n=15
more than 15, he makes money
Where is the Loss Region?
Where is the Profit Region?
Where is the Breakeven point?
Can you make this chart in Excel?
A sunk cost is money already spent due to a past decision.
Suppose that three years ago your parents bought you a laptop PC for $2000.
The $2000 is a sunk cost. It has no influence on the present opportunity to sell the laptop for $400. ( stock costs now $20 you bought for $80)
(5 years at $15,000 per year). It is also enough for you to open a business making web pages for small companies instead of going to college. You estimate you would make $20,000 per year with this business.
Example 2-3. A distributor has a case of electric pumps. The pumps are unused, but are three years old. They are becoming obsolete. Some pricing information is available as follows.
Item Amount Type of Costs
Price for case 3 years ago $7,000
Storage costs to date $1,000
List price today for a case of
new and up to date pumps $12,000
Can be used to help determine what the lot is worth today.
Amount buyer offered for case
2 years ago $5,000
A foregone opportunity
Case can currently be sold for $3,000
Actual market value today
Example 2-4. Philip can choose between model A or model B. The following information is available.
Cost ItemsModel AModel BIncremental Cost of B
Purchase price$10,000 $17,500
Annual maintenance cost $2,500$750
Annual utility expense$1,200$2,000
Disposal cost after useful life$700$500
require the cash transaction of dollars from “one pocket to another”.
are cost effects from past decisions that are recorded in the books (accounting books) of a firm
Example: You might use Edmond’s Used Car Guide to conclude the book value of your car is $6,000. The book value can be thought of as the book cost. If you actually sell the car to a friend for $5,500, then the cash cost to your friend is $5,500.
Life-cycle costs are the summation of all costs, both recurring and nonrecurring, related to a product, structure, system, or service during its life span
Products go through a life cycle, just like people
Nearly 70 to 90% of all costs are set during the design phases, while only 10 to 30% of the cumulative life-cycle costs have been spent.
For the most part, we can use exactly the same approach to estimate benefits as to estimate costs:
Major differences between benefit and costestimation:
Two summer Camps have the following data for a 12-week session:
a. Develop the mathematical relationships for total cost and total revenue for camp A
b. What is the total number of campers that will allow camp B to break even?
c. What is the profit or loss for the 12-week session if camp A operates at 80% capacity?
d. Determine the breakeven number of campers for the two camps to have equal total costs for a 12-week session.
Charge per camper $120 per week
Fixed costs $48,000 per session
Variable cost per camper $80 per week
Capacity 200 campers
Charge per camper $100 per week
Fixed costs $60,600 per session
Variable cost per camper $50 per week
Capacity 150 campers
150Cash Flow Diagrams
Time Period Size of Cash Flow
0 (today) Receive $100 (positive CF)
1 Pay $100 (negative CF)
2 Positive CF of $100
3 Negative CF of $150
4 Negative CF of $150
5 Positive CF of $50
and timing of individual cash flows