Ch 11-1© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Cost Analysis and Estimatingfor Engineering and Management

Chapter 11

The Enterprise

Entrepreneurship

And “Imaginamachina”

Ch 11-2© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Overview

The Business of New IdeasEntrepreneurship

Designing for ProfitTop Down Cost Targets

Designing for Manufacture Financing the Enterprise Legal and Ethical Issues

Ch 11-3© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Changes

Starting a New Business Big Changes to Existing Business Less Than 1% of New Products Succeed Only 2% of Patented Ideas Develop Competition is Intense Need Good Business Planning and

Funding, Along with a Good Idea

Ch 11-4© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

The Enterprise

Ch 11-5© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Free Enterprise

ProducersMake What They Want (Or Not)Charge What They WantCompete How They Want

CustomersBuy What They Want (Or Not)Buy From Whom They Want

Ch 11-6© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Business

Motivated By Profit Players Include

OwnersEmployeesCustomers

Cannot Succeed By Maintaining the “Status Quo”

Ch 11-7© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Launching a Product

Ch 11-8© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Marketing

Identifies a Demand for a Product Creates a Demand for a New Product New Technologies Emerge and Grow

InnovationGrowthStandardizationMaturity

Need Differing Marketing Approaches

Ch 11-9© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Entrepreneurship

Entrepreneurs Supply the IdeasHave a Long Term VisionAre Flexible and Adaptable

Successful Companies MustContinually Add New ProductsConnect Entrepreneurs with Funding

Ch 11-10© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Design for Profit Top Down Estimate

Starts with a Market PriceEnds with “Target Costs”

Ensures: Product Meets Market PriceProduction Can Meet Cost TargetsProfit

Determines Feasibility (Proceed or Kill)

Ch 11-11© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Example

Ch 11-12© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Design for Manufacture

Smart Designs Reduce Cost Large Topic Area Lots of Guidelines, Checklists, etc. Too Big for This Discussion Develop and Compare Design

Alternatives Satisfies Design and Cost Requirements

Ch 11-13© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Alternative Design Comparison   Die casting aluminum

alloy and machiningInvestment casting of

titanium alloyFinish 64 – 125 in. 25 – 64 in

Tolerance 0.002 in. 0.005 in.

Limitations Difficult to fixture, little cost saving with lot sizes

Expensive pattern tooling

Advantages Good for small lot sizes Good accuracy, big cost decrease for lot size, less machining

Reliability 1,500,000 cycles 3,250,000 cycles

Hardness Soft Harder in impact

Ch 11-14© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Example of Alternative CostsLot qty

Machining parts from aluminum

Die casting

aluminum parts

Die casting single

aluminum part

Single part titanium

casting, bigger tolerances, no

machining 

10 $212.62 $463.79    

100 93.17 59.63 $57.21 $173.73

500 91.32 57.42 45.93 54.66

Ch 11-15© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Make-or-Buy

Find Least Cost Source Suppliers May Have Lower Cost

Better TechnologyMore ExperienceBetter Fit for the Job

Compare on Same Basis Lowest Price Is Not Always Lowest Cost

Ch 11-16© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Cost to Buy

In Addition to Quoted PriceTransportation CostsPurchasing and Order Management CostReceiving CostsIncoming Inspection Cost

Ch 11-17© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Intangibles with Buying

Schedule Control Quality Visibility into Status

Ch 11-18© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Considerations for Make Capability – Does the Company Have:

The TechnologyThe SkillsThe Capacity

CapacityShop Load (Plant Utilization)Affects Cost Determination

Ch 11-19© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Costs Based on Utilization  Plant Utilization

Cost items Less than 100%

Greater than 100%

Direct labor Include Include

Direct material Include Include

Variable overhead Include Include

Fixed overhead Omit Include

Marginal cost Include Include

Sunk cost Omit Omit

Profit Omit Management choice

Ch 11-20© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Enterprise Plan

Executive Summary Objectives and Potential Product and Processes Descriptions Keys to Success Market Analysis Income and Cost Analysis Assessment

Ch 11-21© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Example Cost Chart

Ch 11-22© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Example Financial Chart

Ch 11-23© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

AssessmentEconomic Evaluation Criteria for Enterprise Plans

 

Affordability and total cost

Percent profit on investment

Percent profit on sales

Annual cost of production of the product

Unit cost to produce and sell

Unit cost to produce and sell, including profit and taxes

Payout period and return on investment

Amount and time strategy for liquidation

Other “yield” calculations on investment

Ch 11-24© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Entrepreneur’s Challenge

Must Understand the Project and Plan Completely

Consider and Address Potential Questions

Thoroughly Review the Plan Be Able to Answer Any and All

Questions

Ch 11-25© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Funding the Enterprise Personal Resources Existing Company Resources Private Investors Public Funding

StocksBondsDebt (Loans)Alliances

Ch 11-26© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Stocks

Small Units of Ownership Stock Price Appreciation (Share of

Growth) Dividends (Share of Profits) No Guarantees

May Loose Investment

Ch 11-27© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Stock Terms

Market CapitalizationShare Price x Number of Shares

Price Earnings RatioStock Price per Share Earnings

Preferred StockSpecified Dividend RatePreference Over Common Stock

Ch 11-28© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Debt (Loans)

Specified Repayment Amounts and Times

Requires Interest PaymentsCredit Rating Affects Interest RateInterest Is Tax Deductible Expense

Ch 11-29© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Bonds

Stock Is Expensive and Continues Indefinitely

Bonds Are Limited Life Borrowing from Investors Fixed Income Stream (Interest) Principal Repaid at End of Term

Ch 11-30© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Bond Interest Called Coupon Rate Based on U.S Treasury 30-Year Bonds Credit Rating Determines Margin Margin

Rate Above Treasury Rate High Interest Rates Makes Capital

Expensive

Ch 11-31© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Bond Terms

Face Value (Par)Amount to Be Paid at Maturity

Coupon RateSets Magnitude of Interest Payments

YieldCoupon Rate Price

Ch 11-32© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Bond Values Sale Price Is Approximately the Par

Value Present Value

Sum of Remaining Interest PaymentsPlus the Amount Paid at MaturityAll Discounted at a Required Interest Rate

Eq 11.1 ),,/(),,/(0 niFPMniAPIP bb

Ch 11-33© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Bond Trading

Bonds Can Be Traded on the Market Sales Price Depends on Current Interest

Rates Original Purchase Price Means Nothing Higher Current Interest Rates Lower the

Bond Price

Ch 11-34© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Alliances

Joining with Another Company or Individual

Limited Partnership Joint Venture Venture Capital

Ch 11-35© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Seeking Alliances

OfferingDevelop an Enterprise PlanPresent to Interested PartiesAssessment and Due DiligenceNegotiation and Closing

Ch 11-36© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Types of Enterprise

Sole Proprietorship Partnership

Any Partner Can Make Commitments for the Business

CorporationLegal EntityLimits Liability to Investment Only

Ch 11-37© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Ethics and Engineering

Expectation of Highest Standards of Honesty and Integrity

Dedication to Protecting the Public Maintain Objectivity in Fact Finding

and Cost Analysis Maintain Trust and Fairness

Ch 11-38© 2004 Pearson Education, Inc.Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management

Summary

Entrepreneurship and the Enterprise How to Design for Cost and Profit How to Fund the Enterprise Legal Structure of the Enterprise Importance of Ethics