MM 314 Engineering Economy

MM 314 ENGINEERING ECONOMY

DR. MUSTAFA YURDAKUL

COST (Period Expenses-Cost per unit)

BREAK EVEN ANALYSIS

PRESENT ECONOMY ANALYSIS

2Various types of manufacturing costs incurred by a manufacturer

3When a manufacturer produces a SINGLE product type, HOW DO YOU CALCULATE COST PER UNIT?

4When a manufacturer produces MULTIPLE product types, HOW DO YOU CALCULATE COST PER UNIT? THE KEY QUESTION: HOW DO YOU DISTRIBUTE INDIRECT (OVERHEAD) COSTS TO DIFFERENT PRODUCT TYPES?------ VOLUME BASED COSTING------ ACTIVITY BASED COSTING (ABC)

5BREAK-EVEN CHART ANALYSIS-AT LEAST HOW MANY DO WE HAVE TO PRODUCE TO PAY OUR ANNUAL VARIABLE COSTS AND RECOVER OUR FIXED COSTS?

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The general price-demand

relationship

The demand for a

product or service is

directly related to its

price according to p=a-

bD where p is price, D is

demand, and a and b are

constants that depend on

the particular product or

service.

Total revenue depends on price

and demand.

Total revenue is the product of the selling price per

unit, p, and the number of units sold, D.

Calculus can help determine the

demand that maximizes revenue.

Solving, the optimal demand

is

We can also find maximum

profit

Profit is revenue minus cost, so

for

Differentiating, we can find the value of D that maximizes profit.

And we can find revenue/cost

breakeven.

Breakeven is found when total revenue = total cost. Solving, we find the demand at which this occurs.

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EXAMPLE

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TOTAL COST AND COST PER UNIT

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COSTS FOR OPERATING A CAR AND CALCULATION COST PER MILE

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Costvolume relationships pertaining to annual automobile costs

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Average cost per mile of owning and operating a car

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PRESENT ECONOMY EXAMPLES

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