CE 22

Engineering Economy

Lecture 2-2 : Cost Concepts and Design Economics

Lecture 2-2

Cost Concepts and Design Economics

CE 22 – Engineering Economy

Marjorie C. Turiano
Assistant Professor
Institute of Civil Engineering
College of Engineering
University of the Philippines Diliman
 Outline
• Cost-driven Design Optimization
• Present Economy Studies

Lecture 2-2 : Cost Concepts and Design Economics

CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 2

 Attendance Quiz
Indira Industries is a major producer of diverter dampers used in gas turbine power
industry to divert gas exhausts from the turbine to a side stack, thus reducing the
noise to acceptable levels for human environments.

Lecture 2-2 : Cost Concepts and Design Economics

Due to significantly improved economic conditions in Asia, production
is 72 units per month. The following information is available:
• Fixed cost: $ 2.4 million per month
• Variable cost per unit: $35,000
CE 22 – Engineering Economy

• Revenue per unit: $75,000

a) How many units must be produced per month to attain breakeven?
b) Determine the amount of profit (or loss) in the current production
level.

A.Y. 2019-2020, First Semester 3

 Cost Concepts and Design Economics
Considerations in design:
• Safety

Lecture 2-2 : Cost Concepts and Design Economics

• Serviceability
•$
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 4

 Lecture 2-2 : Cost Concepts and Design Economics
Cost-driven Design
Optimization
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 5

 Cost-driven Design Optimization
Engineers must maintain a life-cycle viewpoint as they design
products, processes, and services.

Lecture 2-2 : Cost Concepts and Design Economics

• Initial investment costs
• O&M expenses
• Environmental and social consequences over the life of the design
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 6

 Cost-driven Design Optimization
1) What is the optimal value for a certain alternative’s design
variable

Lecture 2-2 : Cost Concepts and Design Economics

• e.g. What diameter of rebar delivers the safe load capacity but reduces
the total cost of materials?

2) Selection of the best alternative

CE 22 – Engineering Economy

• e.g. 16mmΦ, 32mmΦ

A.Y. 2019-2020, First Semester 7

 Cost-driven Design Optimization
Cost models consists of three types of costs:
• Fixed costs

Lecture 2-2 : Cost Concepts and Design Economics

• Costs that vary directly with the design variable
• Costs that vary indirectly with the design variable
𝑏
Cost = 𝑘 + 𝑎𝑋 +
𝑋
𝑎 : parameter that represents directly varying cost(s)
CE 22 – Engineering Economy

𝑏 : parameter that represents indirectly varying cost(s)

𝑘 : parameter that represents fixed costs
𝑋 : represents design variable in question
In more general terms:
Cost = 𝑘 + 𝑎𝑋 + 𝑏1 𝑋 −1 + 𝑏2 𝑋 2 + +𝑏3 𝑋 3 + ⋯
A.Y. 2019-2020, First Semester 8
 Cost-driven Design Optimization
General approach for optimizing a design with respect to cost:
1. Identify the design parameter that is the primary cost driver

Lecture 2-2 : Cost Concepts and Design Economics

2. Write an expression for the cost model in terms of the design variable
3. Set the first derivative of the cost model with respect to the design
variable equal to zero.
4. Evaluate the cost model using the optimum value of the design
parameter.
CE 22 – Engineering Economy

5. Evaluate the second derivative of the cost model to determine

whether optimum value is a maximum or a minimum.

A.Y. 2019-2020, First Semester 9

 Cost-driven Design Optimization
Example 2.5
The cost of operating a jet-powered commercial airplane varies

Lecture 2-2 : Cost Concepts and Design Economics

as the 3/2 power of its velocity (𝐶𝑂 = 𝑘𝑛𝑣 3/2 ), where 𝑛 is the trip
in miles, 𝑘 is a constant of proportionality, and 𝑣 is the velocity in
miles per hour. It is known that at 400 mi/hr, the average cost of
operation is $300 per mile. The company that owns the aircraft
CE 22 – Engineering Economy

wants to minimize the cost of operation, but that cost must be

balanced against the cost of the passengers’ time (𝐶𝐶 ), which has
been set as $300,000 per hour. At what velocity should the trip be
planned to minimize the total cost?

A.Y. 2019-2020, First Semester 10

 Lecture 2-2 : Cost Concepts and Design Economics
Present Economy Studies
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 11

 Present Economy Study
Cost analyses where the influence of time on money
is not a significant consideration.

Lecture 2-2 : Cost Concepts and Design Economics

(i.e. lifecycle is one year or less)

Examples:
• Total cost in material selection
CE 22 – Engineering Economy

• Making vs Purchasing (Outsourcing) Studies

• Trade-offs in energy efficiency studies

A.Y. 2019-2020, First Semester 12

 Present Economy Study
Rule 1 Rule 2
When the revenues and other When revenues and other

Lecture 2-2 : Cost Concepts and Design Economics

economic benefits are present economic benefits are not
and vary among alternatives, present or are constant among
choose the alternative the all alternatives, consider only
maximizes overall profitability. the costs and select the
CE 22 – Engineering Economy

alternative that minimizes the

total cost.

A.Y. 2019-2020, First Semester 13

 Present Economy Study
Example 2.6 (Total Cost in Material Selection)
An engineered product part has an annual demand of 100,000 units. The

Lecture 2-2 : Cost Concepts and Design Economics

part is produced on a high-speed turret lathe, using 1112 screw-machine
steel costing $0.30 per pound. A study was conducted to determine whether
it might be cheaper to use brass screw stock, costing $1.40 per pound. The
weight of steel required per piece was 0.0353 pounds and that of brass was
0.0384 pounds. However, when the manufacturing engineering department
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was consulted, it was found that although 57.1 defect-free parts per hour
were being produced by using steel, the output would be 102.9 defect-free
parts per hour if brass were used. Which material should be used for this
part? The machine attendant is paid $15.00 per hour, and the overhead
costs for the turret lathe are estimated to be $10.00 per hour.

A.Y. 2019-2020, First Semester 14

 Present Economy Study
Example 2.6 (Total Cost in Material Selection)
An engineered product part has an annual demand of 100,000 units. The

Lecture 2-2 : Cost Concepts and Design Economics

part is produced on a high-speed turret lathe, using 1112 screw-machine
steel costing $0.30 per pound. A study was conducted to determine whether
it might be cheaper to use brass screw stock, costing $1.40 per pound. The
weight of steel required per piece was 0.0353 pounds and that of brass was
0.0384 pounds. However, when the manufacturing engineering department
CE 22 – Engineering Economy

was consulted, it was found that although 57.1 defect-free parts per hour
were being produced by using steel, the output would be 102.9 defect-free
parts per hour if brass were used. Which material should be used for this
part? The machine attendant is paid $15.00 per hour, and the overhead
costs for the turret lathe are estimated to be $10.00 per hour.

A.Y. 2019-2020, First Semester 15

 Present Economy Study
Direct (1 operator working 4 hours
Labor per day at $22.50/hr, plus a
Example 2.7 (Making versus part-time foreman at $30 per
$ 120.00
Purchasing Studies) day

Lecture 2-2 : Cost Concepts and Design Economics

A manufacturing plant consists of three Direct $ 86.40
Material
departments: A, B, and C. Department A
occupies 100 square meters in one Overhead (at $0.82 per square meter
$ 82.00
floor area)
corner of the plant. Product X is one of
Total cost per day = $288.40
several products being produced in
Department A. the daily production of An outside company sells product X at
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Product X is 576 pieces. The cost $0.35 per piece. It has been estimated
amounting records show the following that there will be daily savings in
average daily production costs for overhead costs traceable to Product X
Product X: of $3.00. Should the plant continue
producing the Product X, or outsource it
from an outside company?
A.Y. 2019-2020, First Semester 16
 Present Economy Study
Example 2.8 (Energy Efficiency Studies)
Two pumps capable of delivering 100 hp to an agricultural application are

Lecture 2-2 : Cost Concepts and Design Economics

being evaluated in a present economy study. The selected pump will only be
utilized for one year, and it will have no market value at the end of the year.
Pertinent data are summarized as follows:
ABC Pump XYZ Pump
Purchase Price $ 2,900 $ 6,200
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Maintenance Cost $ 170 $ 510

Efficiency 80% 90%
If electric power costs $0.10 per kWh and the pump will be operated 4,000
hours per year, which pump should be chosen? (1hp = 0.746 kW)
A.Y. 2019-2020, First Semester 17
 References
• Sullivan, William G. Engineering Economy. Pearson
Education, 16th ed.

Lecture 2-2 : Cost Concepts and Design Economics

CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 18