Question

a. Explain the relevance of minimum cost analysis in engineering economics

B. Formulate a strong argument for applying minimum cost analysis to the design of a product in a plant that you own.  Please identify the product and explain how its design can benefit from the minimum cost analysis.

Answer 1

Engineering economics is the application of science. It established varied application systems based on different scientific principles. Efficient and effective functioning of the organization would certainly help it to provide goods/services at a lower cost which in turn will enable to fix a lower price for its goods or services.

Definition:

Engineering economics deals with the method that enable on to take economic decisions towards minimizing costs and maximizing benefits to the business organizations.

a)

Relevance of minimum cost analysis:

• Costs as well as revenues are considered, for each alternative, for an analysis period that is either a fixed number of years or the estimated life of the project. The salvage value is often forgotten, but is important, and is either the net cost or revenue for decommissioning the project.
• Cost–benefit analysis, sometimes also called benefit–cost analysis, is a systematic approach to estimating the strengths and weaknesses of alternatives used to determine options which provide the best approach to achieving benefits while preserving savings.

• We will assume a clearing crew of 20 men is clearing road right-of-way and the following facts are available:

  1. Men are paid at the rate of $0.40 per hour.
  2. Time is measured from the time of leaving camp to the time of return.
  3. Total walking time per man is increasing at the rate of 15 minutes per day.
  4. The cost to move the camp is $50.

b)

Strong argument for applying minimum cost analysis to the design of a product in a plant:

• Plant is a best alternative to minimum cost analysis .
• Fixed capital
• Manufacturing (direct)
• Nonmanufacturing (indirect)
• Working capital Product Costs
• Manufacturing costs
• Variable costs
• Fixed costs
• Overhead costs
• General expenses
• Administrative expenses
• Distribution & Marketing costs

Benefit from the minimum cost analysis:

1. Discount costs and benefits to obtain present values. This means converting future costs and benefits into present value. This is also known as the social discount rate, or the rate at which society makes tradeoffs over time. Every agency tends to have a different discount rate. It generally ranges between 2-7%.
2. Set the framework for the analysis. Specify the program or policy change and the current status quo, or the state of the world before implementation compared to after.
3. Decide whose costs benefits should be recognized. You need to determine the geographic scope of the analysis in order to limit the groups impacted by the policy.
4. Project costs and benefits over the life of the program. Assess how costs and benefits will change each year. It is important to do this even before you begin to place numbers on things.
5. Compute net present values. This is done by subtracting costs from benefits. The policy is considered efficient if a positive result is produced; however, it is important to think about the policy’s feasibility and social justice.
6. Monetize costs. Make sure to place all costs in the same unit.
7. Identity and categorize costs and benefits. It is important to label costs and benefits as direct (intended costs/benefits)/indirect (unintended costs/benefits), tangible (easy to measure and quantify)/intangible (hard to identify and measure), and real (anything that contributes to the bottom line net-benefits)/transfer (money changing hands) in order to ensure that you understand the effects of each cost and benefit.
8. Monetize benefits. Make sure to place all benefits in the same unit.
9. Make a recommendation. Assess all results and account for other qualitative considerations.
10. Perform sensitivity analysis. This step allows you to check the accuracy of your estimates and assumptions. This is normally done by altering the social discount rate utilized, by increasing it and decreasing it. If you still get a positive number during this step, then the policy should be accepted. If you get a negative number during this step, then you should calculate where the balancing point is zero.