ch2(2011
TRANSCRIPT
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Chapter 2Cost Concepts And Design
Economic
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Fixed, Variable and Incremental costs.
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Fixed costs :
Unaffected by changes in activity level over a feasible range of operations for the capacity or capability available.
Example :insurance and taxes on facilities, administrative salaries, license fees, and interest costs on borrowed capital.
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Variable Costs :
• It vary in total with the number of the output unite .
• Example : costs of material and labor used in a product or
service, because they vary in total with the number of output units even though costs per unit remain the same.
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More ways to categorize costs
• Direct: can be measured and allocated to a specific work activity
(Materials, Labor)• Indirect: difficult to attribute or allocate to a
specific output or work activity
(overhead, maintenance)• Standard cost: cost per unit of output,
Standard costs play an important role in cost control and
other management functions.
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• Cash cost: a cost that involves a payment of cash.• Book cost: a cost that does not involve a cash
transaction but is reflected in the accounting system.
( equipments, machines, Depreciation)
• Sunk cost: a cost that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action.
(money spend on a passport)
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• Opportunity cost: the monetary advantage foregone due to limited resources. The cost of the best rejected opportunity.
( A student can work with 10,000$ Per year. or goes to the university for a year and spend 5,000$. Opportunity cost = 15,000$)
• Life-cycle cost: the summation of all costs related to a product, structure, system, or service during its life span.
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Example 2-1
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Cost FactorCost Factor Site ASite A Site BSite BDistanceDistance 6 miles6 miles 4.3 miles 4.3 miles
Monthly Monthly rental costrental cost
$1,000$1,000 $5,000$5,000
Cost (Set up $ Cost (Set up $ Removing) Removing) EquipmentEquipment
$15,000$15,000 $25,000$25,000
Hauling Hauling expensesexpenses
$1.15/yd$1.15/yd33 – – mile mile
$1.15/yd$1.15/yd33 – – mile mile
Flag personFlag person No needNo need $96/day$96/day($8,160)($8,160)
•5,000 cubic yards of asphalt•4 months (17 weeks 5- days a week)•Compare the 2 sites??!!!!!•NOTE: •Rent , Set up/ Removal and Flag person are Fixed costs BUT
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BUT Hauling is variable costSite A = 6*5000*$1.15 = $345,000Site B= 4.3*5,000*$1.15 = $247,250Then the total cost is
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2. Which is the better site? Site B
3. How many cubic yards of asphalt does the contractor have to deliver before starting to make a profit if paid 8.05$ per cubic yard
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الدنيا في زهده سر عن البصري الحسن سئلفقال:
أشياء أربعة
. به فاشتغلت غيري به يقوم ال عملي أن علمت
فاطمأن غيري إلى يذهب ال رزقي أن وعلمتقلبي.
يراني أن فاستحييت علي مطلع الله أن علمت و . معصية على
للقاء الزاد فاعددت ينتظرني الموت أن وعلمتربي.
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The General Economic Environment
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Consumer and Producer Goods and Service
Consumer Goods and Service: are those products or service that are directly used by people to satisfy their wants.
Producer Goods and Service: are used to produce consumer goods or service or other producers goods.
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Goods and service are produced and desired because they have utility.
Utility: The power to satisfy human wants and needs.
Utility is most commonly measured in terms of value.
Value: the price that must be paid to obtain the particular item.
Necessities and Luxuries needs.
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Price And Demand
Engineering focusing on increasing the utility (value) of materials by changing their form or location.
P : the price that must be paid D: is the quantity that must be demanded or
purchased
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The general price-demand relationship
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The demand for a product or service is directly related to its price according to
p = a - bD
for 0 ≤ D ≤ a/b , a > 0, b > 0
where p is price, D is demand, and a and b are constants that depend on the particular product or service.
a = price axis intercept
-b = slope
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Competition
Perfect Competition: occurs in a situation in which any given product is supplied by a large number of venders and there is no restriction on additional suppliers entering the market (never occurs in actual practice).
Perfect Monopoly: exist when a unique product or service is only available from a single supplier and that vender can prevent the entry of all others into the markets. (rarely occurs in the practice)
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Total Revenue Function
Total revenue is the product of the selling price per unit, p, and the number of units sold, D.
TR = p × D
From: p = a – bD
We find:
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Maximize Revenue
b
aD
2ˆ The demand at maximum revenue:
2DbDaTR
b
a
b
a
b
aDbDaTRMaximum
442ˆˆ
2222
022
2
bdD
TRd
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Profit
Profit = Total Revenue (TR) – Total Cost (CT)
VFT CCC Total Cost (CT) = Fixed Cost (CF) + Variable Cost (CV)
DcC vV Variable Cost (CV) = Variable cost per unit (cv) × Demand (D)
DcCC vFT Total Cost:
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Maximum profit
Scenario 1: Demand is a function of price ( p = a – bD)
2DbDaTR
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Profit = Total Revenue (TR) – Total Cost (CT)
DcCC vFT and
and 2DbDaTR
Then )()(Profit 2 DcCDbDa vF
Fv CDcaDb )(Profit 2
To find the maximum profit 02)(
DbcadD
profitdv
b
caD v
2*
Demand at Max profit:
02)(
2
2
bdD
profitd
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Breakeven points are found when
Total Revenue = Total Cost.
DcCDbDa vF 2
0)(2 Fv CDcaDb
b
CbcacaD Fvv
2
4 21
2
The demand at breakeven:
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Example: A company produces an electronic timing switch. The fixed cost (CF) is 73,000$ per month. The variable cost per unit (cv) is 83$. The selling price per unit (p = 180$ – 0.02D).
A. Determine the optimal volume of product?B. Find the volume at breakeven occurs, what is the range of
profitable demand?
Solution:A. a = 180, b = 0.02
monthperunits425,202.02
83180
2*
b
caD v
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B. Total Revenue = Total Cost.
DcCDbDa vF 2
0)(2 Fv CDcaDb
b
CbcacaD Fvv
2
4 21
2
02.02
7300002.049797 21
2
D
monthperunit93204.0
74.59971
D
monthperunit918,304.0
74.59972
D
Range = 932 to 3,918 unit per month
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Scenario 2: Price and Demand are independent
TR = P × D
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Example:Variable cost per service hour = 62$.Selling price = 85.56$ per hour.Maximum Hours per year = 160,000 hours.Fixed cost = 2,024,000$ per year.A. What is the breakeven point in hours and in % of total capacity? Total revenue = Total cost (breakeven) DcCDp vF
v
F
cp
CD
yearperhours908,856256.85
2024000
D
capacityof%7.53537.0000,160
908,85D
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B. What is the % reduction In breakeven point (sensitivity) if: 1. Fixed cost reduced by 10%?
2. variable cost per hour reduced by 10%?
yearperhours138,77
6256.85
20240009.0
D
%101.0908,85
318,77908,85reduction
D
yearperhours011,68629.056.85
2024000
D
%8.20208.0908,85
011.68908,85reduction
D
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3. selling price increase by 10%?
yearper hours021,636256.851.1
2024000
D
%6.26266.0908,85
021,63908,85reduction
D
Then the breakeven point is more sensitive to reduction in variable cost than fixed cost