In an environmental upgrade of a minimill making steel bar, it is found that a purchase must be made for a large cyclone dust collector. It is the time of the year for capital budget submissions, so there is no time for quotations from suppliers. The last unit of that type was purchased in 1985 for $35,000. It had a 100ft3/min capacity. The new installation in 2012 will require 1000ft3/min capacity. The cost escalation for this kind of equipment has been about 5 percent per year. For budget purposes, estimate what it will cost to purchase the dust collector.
SOLUTION:
C1 = C0 (L1/L0)x
C0=
$35,000 L0= 100ft3/min
L1= 1000ft3/min
C1= ?
Based on Table 17.4, x for dust collector= 0.61. Because of
economies of scale, the new unit has 10 times the capacity as the unit
purchased in 1985 will not cost 10 times more. However, the purchase cost
will have increased because of inflation in the 22 years since it was purchased
in 1985. Assuming cost inflation in of 5% per year, the original cost of
$35,000 is now equivalent to:
35000(1+0.05)22 =
35000(2.92526) = $102389
Thus, the cost estimation can be calculated as:
C1 = 102389(1000/1000)0.61 = $777000
17.2:
Many consumers item today are designed in the United State and manufactured over-seas where labor cost is much lower. A middle range athletic shoe from a name brand manufacturer sells for $70 in the U.S. The shoe company buys the shoe from an off-shore supplier for $20 and sells to the retailer for $36. The profit margin for each unit in the chain is: supplier-9%, shoe company-17%, retailer-13%. Estimate major categories of cost breakdown for each unit of chain. Do this as a team problem and compare the results for the entire class.
SOLUTION:
Estimation of the major categories of
cost breakdown for each unit in the chain :
Shoe Company
Production
labor
$2.75
Materials
$9.00
Rent,
equipment
$3.00
Supplier’s operating
profit
$1.75
Duties
$3.00
Shipping
$0.50
Total
cost
$20.00
Retailer
Research and
development
$20.50
Promotion and
advertising
$4.00
Sales, distribution,
admin
$5.00
Company’s operating
profit
$6.50
Total
cost
$36.00
Consumer
Retailer’s
rent $20.00
Personnel
$15.00
Others
$15.00
Retailer’s operating
profit
$20.00
Total
cost
$70.00
17.4:
A manufacturer of a small hydraulic turbine has the annual cost
data given. Calculate the manufacturing cost and the selling price for the
turbine:
Raw material and components
costs
$2,150,000
Direct labor
950,000
Direct
expenses 60,000
Plant manager and
staff
180,000
Utilities for
plant
70,000
Taxes and
insurance
50,000
Plant and equipment depreciation
120,000
Warehouse Expenses
60,000
Office
Utilities
10,000
Engineering expenses (plant)
90,000
Engineering staff and salaries
(plant)
30,000
Administrative staff salaries
120,000
Sales staff, salaries and
commissions 100,000
Total Annual Sales
60 units
Profit Margin
15%
SOLUTION:
Variable costs
Raw material and components costs
$2,150,000
Direct labor
$950,000
Direct expenses
$60,000
Engineering expenses (plant)
$90,000
Engineering staff and salaries (plant)
$30,000
Total Variable
Costs
$3,280,000
Factory Expenses
Utilities for
plant
$70,000
Taxes and insurance
$50,000
Plant and equipment depreciation
$120,000
Warehouse
Expenses
$60,000
Total Factory Expenses
$300,000
General and Administrative Expenses (G & A)
Plant manager and
staff
$180,000
Office
Utilities
$10,000
Administrative staff salaries
$120,000
Total G & A
$310,000
Manufacturing Cost = Variable costs + Factory Expenses + General
and Administrative Expenses
= $3,280,000 + $300,000 + $310,000
=
$3,890,000
Sales, staff, salaries and
commissions $100,000
Total
Cost
= Manufacturing costs + Sales, staff, salaries and commissions =
$3,990,000
Manufacturing cost for a turbine = $3,990,000
Total Annual Sales = 60 units
Selling Price for One Turbine = S / 60 =
$4,694,117.65 / 60
Selling Price = $78,235.29 per unit
Selling Price = $78,235.29 per unit
17.10:
A company has received an order for four sophisticated space widgets. The buyer will take delivery of one unit at the end of the first year and one unit at the end of each of the succeeding three years. He will pay for a unit immediately upon receipt and not before. However, the manufacturer can make the units ahead of time and store them at negligible cost for future delivery.
The chief component of cost of the space widget is labor at $25 per h. All units made in the same year can take advantage of an 80% learning curve. The first unit requires 100,000 h of labor. Learning occurs only in one year and is not carried over from year to year. If money is worth 16% after a 52% tax rate, decide whether it would be more economical to build four units the first year and store them, or build one unit in each of the four years.
The chief component of cost of the space widget is labor at $25 per h. All units made in the same year can take advantage of an 80% learning curve. The first unit requires 100,000 h of labor. Learning occurs only in one year and is not carried over from year to year. If money is worth 16% after a 52% tax rate, decide whether it would be more economical to build four units the first year and store them, or build one unit in each of the four years.
SOLUTION:
For an 80% learning curve, n = -0.322. The first unit requires y1 = 100,000 h to build.
The cost of making four units in one year is:
(100,000 + 80,000 +70,175 +63,979) x $25/h = $7,853,850
No Advantage from Learning Curve: If we do not take advantage of the learning curve we would make one space widget each year for a total cost over four years of
(100,000) x $25 x 4 = $10,000,000. This neglects the cost of living escalation that would occur each year, but it will be assumed that this would equal the cost of maintaining widgets in storage for up to four years.
In terms of engineering economy, the problem becomes which of the two alternatives results in the lowest present value. The present value (P) after taxes, assuming that labor costs are paid at the end of the year (an unrealistic but conventional assumption in engineering economy), for the use of the learning curve situation is given as:
If the four units are made in four successive years,
= 0.48(2,155,172 + 1,857,907 + 1,601,644 + 1,380,728) =0.48(6,995,451)
= $3,357,816
Taking advantage of the learning curve saves over $100,000 in cost compared with making one widget each year and deferring the costs into the future. Making the widgets in a batch also frees up the work force to take on other profitable work.
