Chapter_2_Cost_Estimate

Chapter_2_Cost_Estimate - Chapter 2 Engineering Costs and...

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Copyright Oxford University Press 2009 Chapter 2 Engineering Costs and Cost Estimating
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Copyright Oxford University Press 2009 Types of Costs Fixed Costs & Variable Costs Marginal Costs & Average Costs Sunk Costs & Opportunity Costs Recurring & Non-recurring Costs Incremental Costs Cash Costs & Book Costs Life-Cycle Costs
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Copyright Oxford University Press 2009 Fixed Costs and Variable Costs Fixed Costs: constant, independent of the output or activity level. Property taxes, insurance Management and administrative salaries License fees, and interest costs on borrowed capital Rental or lease Variable Costs: Proportional to the output or activity level. Direct labor cost Direct materials
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Copyright Oxford University Press 2009 Breakeven Analysis Total Variable Cost = Unit Variable Cost * Quantity TVC = VC * Q Total Cost = Fixed Cost + Total Variable Cost TC = FC + VC * Q Total Revenue = Unit Selling Price * Quantity TR = SP * Q where TVC = Total variable cost VC = Variable cost per unit Q = Production/Selling quantity FC = Fixed costs TR = Total revenue SP = Selling price per unit
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Copyright Oxford University Press 2009 Breakeven Analysis Breakeven point: the output level at which total revenue is equal to total cost. SP * BEP = FC + VC * BEP BEP = FC / (SP - VC) where BEP = breakeven point FC = fixed costs SP = selling price per unit VC = variable cost per unit Applications of Breakeven analysis: Determining minimum production quantity Forecast production profit / loss
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Copyright Oxford University Press 2009 Breakeven Analysis Production Quantity $ Break-even Point Fixed Costs Variable Costs Total Costs Total Revenue Loss Profit
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Copyright Oxford University Press 2009 Marginal Costs and Average Costs Marginal Costs: the variable cost for one more unit of output Capacity Planning: excess capacity Basis for last-minute pricing Average Costs: total cost divided by the total number of units produced. Basis for normal pricing
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Copyright Oxford University Press 2009 Sunk Costs & Opportunity Costs Sunk Costs: Cost that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative Purchasing price of current equipment in deciding new equipment (except for capital gain/loss consideration) Opportunity Costs: Cost of the foregone opportunity and is hidden or implied Existing equipment in replacement analysis
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Copyright Oxford University Press 2009 Recurring Costs and Non-recurring Costs Recurring Costs: Repetitive and occur when a firm produces similar goods and services on a continuing basis Office space rental Non-recurring Costs: Not repetitive, even though the total expenditure may be cumulative over a period of time Typically involve developing or establishing a capability or capacity to operate Examples are purchase cost for real estate and the construction costs of the plant
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