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What is Engineering Economy? What is meant by an economic analysis? Can you think of an engineering or business decision that might require an economic analysis?
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Example - You work for a company that manufactures circuit breakers. The company is contemplating accepting a large order to manufacture circuit breakers for one of your most important customers. You want to take the order, but do not presently have enough capacity in your plant to complete the order per the customers due date. What should you do?
ETHICS
Ethical issues might arise in any step of the decision making process and are certainly common in engineering economic analysis National Society of Professional Engineers (NSPE) fundamental canon of ethical behavior for engineering Examples
Favors for influencing choices Cost versus quality versus functionality Environmental Safety versus cost
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ECONOMIC ENVIRONMENTS
Perfect Competition - products are supplied by a large number of vendors and there is no restriction on additional vendors entering the market. Monopoly - a perfect monopoly is the complete opposite of perfect competition. Sometimes a monopoly can be good other times it can be bad. Oligopoly - an environment that contains so few suppliers that action by one supplier results in a similar action by the others.
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Demand
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CONSIDERING COSTS
Thus, if Price is Fixed, the higher the TR, the larger the profits and D* = infinity (or to capacity) will maximize Profit where D* Demand Level to Maximize Profit
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Price is Fixed
Breakeven Point: Breakeven Point: D' = CF / (p - cv) where D' is the demand level to breakeven TR = CT pD' = CF + cvD'
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Price-axis intercept
b
D
Slope
Demand
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TR = aD - bD2
To maximize TR, take the first derivative and set it equal to 0 dTR / dD = a - 2bD = 0
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Solving for both roots of this quadratic equation will yield D' = -(a - cv) [(a - cv)2 - 4(-b)(-CF)]1/2 2(-b)
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= infinity or capacity D
a D 2b
(a cv ) 2b
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D'
Dependent Case:
( p cv )
CF
D'
Examples
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Rule 1 When revenues and other economic benefits are present and vary among alternatives, choose the alternative that maximizes overall profitability based on the number of defect-free units of a product or service produced. Rule 2 When revenues and other economic benefits are not present or are constant among all alternatives, consider only the costs and select the alternative that minimizes total cost per defect-free unit of product or service output
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EXAMPLE
A company is analyzing a make-versus-purchase situation for a component used in several of its products. The engineering department has provided the following: Purchase 10,000 items per year at a fixed price of $8.50 per item. Manufacture 10,000 items per year, using available capacity in the factory. Direct materials are $5 per item, direct labor is $1.50 per item, and overhead is allocated at 200% of direct labor. Should the company make or purchase the item? What if we consider other consequences of the decisionwould your decision change?
From Sullivan, et. al. Engineering Economy , 14 edition.
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