Lec%203_Full

Lec%203_Full - IE 343 Engineering Economics Lecture 3:...

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IE 343 Engineering Economics Lecture 3: Chapter 2 - Cost Concepts and Design Economics Instructor: Tian Ni Aug. 26, 2011 IE 343 Fall 2011 1
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• Seven Principles • Principle 1: Develop the alternatives • Principle 2: Focus on the differences • Principle 3: Use a consistent viewpoint • Principle 4: Use a common unit of measure • Principle 5: Consider all relevant criteria • Principle 6: Make risk and uncertainty explicit • Principle 7: Revisit your decisions IE 343 Fall 2011 Last Time … 2
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Step1: Problem recognition, formulation, and evaluation. Step2: Development of the feasible alternatives. Step3: Development of the outcomes and cash flows for each alternative. Step4: Selection of a criterion (or criteria). Step5: Analysis and comparison of the alternatives. Step6: Selection of the preferred alternative. Step7: Performance monitoring and post-evaluation of results. IE 343 Fall 2011 Seven Steps of engineering economic analysis 3
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Cost Classification IE 343 Fall 2011 4
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Cost classification (Fixed vs Variable) Fixed Costs: Costs that are constant and unaffected by the level of the activity . Costs that remain constant over a relevant range of output Example : Insurance, rent, administrative salaries. Variable Costs: Costs that vary directly with sales or production volume . Operating costs that vary in total with the quantity of output or other measures of activity level. Example : Materials, labor. IE 343 Fall 2011 5
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Cost classification (Incremental Costs) Incremental costs are the additional costs that result from increasing the output level by one or more units. (Go – no go decision) Example : incremental cost per mile for driving an automobile is $0.49, depending on considerations such as total mileage driven during the year, mileage expected for the next major trip, the age of the automobile. “incremental cost of producing a barrel of oil” or “ incremental cost to the state for educating a student”. IE 343 Fall 2011 6
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Albert plans to charter a bus to take his friends to see a concert in the city. Albert’s costs: Item Cost 1. Bus Rental $ 100 2. Ticket $ 12.50 3. Gas Expense $ 75 4. Bus Driver $ 50 5. Refreshments $ 7.50 Which of the above are fixed and which are variable costs? IE 343 Fall 2011 Example 2.1 7
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IE 343 Fall 2011 Fixed Cost Variable Cost Item Cost Item Cost Bus Rental $100 Ticket $12.5/person Gas Expense $75 Refreshments $7.5/person Bus Driver $50 Total Fixed Cost: $225 Total Variable Cost: $20/person Example 2.1 – Solution 8
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Cost classification (Recurring vs Nonrecurring) Recurring Costs: Costs that are anticipated and occur at regular intervals. They generally occur when an organization produces similar goods on a continuing basis. Example
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Lec%203_Full - IE 343 Engineering Economics Lecture 3:...

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