Selections in Present

Economy
Equity capital or ownership funds are those supplied and used by the owners of an enterprise
in the expectation that a profit will be earned.
Borrowed funds or capital are those supplied by others on which a fixed rate of interest must
be paid and the debt must be repaid at a specified time.
Types of Business Organizations
A. Individual Ownership – simplest form of business organization, wherein a person uses his
or her own capital to establish and is the sole owner
B. Partnership – is an association of two or more persons for the purpose of engaging in a
business for profit.
C. Corporation – is a distinct legal entity, separate from the individuals who own it, and which
engage in almost any type of business transaction in which a real person could occupy
himself or herself. The capital of a corporation is acquired through the sale of stock.
Common Stock – represents ordinary ownership without special guarantees of return.
Preferred stock – are guaranteed a definite dividend on their stocks.
Other terms:
Assets add value to your company and increase your company’s equity, while
liabilities decrease your company’s value and equity. The more your assets
outweigh your liabilities, the stronger the financial health of your business.

Present Economy Studies

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.
Total Cost in Material, Tools and Equipment Selection
In many cases, economic selection among materials cannot be based solely on the
costs of materials. Frequently, a change in materials will affect the design and
processing costs, and shipping costs may also be altered.

A good example of this situation is illustrated by a part for which annual demand is
100,000 units. The part is produced on a high-speed turret lathe, using 1112 screw-
machine steel costing $0.30 per pound. A study was conducted to determine whether it
might be cheaper to use brass screw stock, costing $1.40 per pound. Because the weight
of steel required per piece was 0.0353 pounds and that of brass was 0.0384 pounds, the
material cost per piece was $0.0106 for steel and $0.0538 for brass. However, when the
manufacturing engineering department was consulted, it was found that, although 57.1
defect-free parts per hour were being produced by using steel, the output would be
102.9 defect free parts per hour if brass were used. Which material should be used for
this part? The machine attendant is paid $15.00 per hour, and the variable (i.e.,traceable)
overhead costs for the turret lathe are estimated to be $10.00 per hour.
Choosing the Most Economical Machine for Production
Two currently owned machines are being considered for the production of a part. The capital
investment associated with the machines is about the same and can be ignored for purposes of this
example. The important differences between the machines are their production capacities
(production rate X available production hours) and their reject rates (percentage of parts produced
that cannot be sold). Consider the following table:

The material cost is $6.00 per part, and all defect-free parts produced can be sold for $12 each.
(Rejected parts have negligible scrap value.) For either machine, the operator cost is $15.00 per hour
and the variable overhead rate for traceable costs is $5.00 per hour.
(a) Assume that the daily demand for this part is large enough that all defect-free parts can be sold.
Which machine should be selected?
(b) What would the percent of parts rejected have to be for Machine B to be as profitable as
Machine A?
Problem 1:An electrical contractor has a job which should be completed in
100 days. At present he has 80 men on the job and it is estimated that they
will finish the work in 130 days. If of the 80 men, 50 are paid P190 a day, 25 at
P220 a day and 5 at P300 a day and if for each day beyond the original 100
days, the contractor has to pay P2,000 liquidated damages:
a. How many more men should the contractor add so he can complete the
work on time?
b. If additional men of 5 are paid P220 a day and the rest P190 a day, would
the contractor save money by employing more men and not paying the
fine?
Problem 2: The monthly demand for ice cans being manufactured by Mr. Cruz
is 3,200 pieces. With a manually operated guillotine, the unit cutting cost if
P25.00 An electrically operated hydraulic guillotine was offered to Mr. Cruz at
a price of P275,000 and which will cut by 30% the unit cutting cost.
Disregarding the cost of money, how many months will Mr. Cruz be able to
recover the cost of the machine if he decides to buy now?
Problem 3: The making of rivets holes in structural steel members can be
done by two methods. The first method consists of laying out the position
of the holes in the members and using a drill press costing P30,000. The
machinist is paid P35 per hour and he can drill 30 holes per hour.

The second method makes use of a multiple-punch machine costing

P27,500. The punch operator is paid P30 an hour and he can punch out 4
holes every minute. This method also requires an expense of P1.75 per hole
to set the machine.
a. If all other costs are assumed equal, what is the total cost of each
machine for 6,000 holes, assuming the total cost of each machine to be
charged to these holes?
b. For how many holes will the costs be equal?
Problem 4: The volume of the raw material required for a certain machine
part is 2.02 cu. cm. The finished volume is 1.05 cu cm. The time for machining
each piece is 45 seconds for steel and 30 seconds for brass. The costs of steel
is P32.50 per kg and the value of steel scrap is negligible. The cost of the brass
is P60.00 per kg and the value of brass scrap is P25.00 per kg. The wage of the
operator is P40.00 per hour and the overhead cost of the machine is P50.00
per hour. The weight of steel and brass are 0.081 and 0.0088 kg per cu cm,
respectively. Which material will you recommend?
Problem 5: High carbon steel or alloy steel can be used for the set of tools on
a lathe. The tools must be sharpened periodically. Data for each are as
follows:
High carbon steel Alloy steel
Output per hour 60 pcs 70 pcs
Time between tool grinds 4 hr 6 hr
Time required to change tools 1 hr 1 hr

The wage of the lathe operator if P50.00 per hour, based on actual working
hours. The tool changer cost P60.00 per hour. Overhead costs for the lathe
are P45.00 per hour, including tool-change time. A set of unsharpened high
carbon steel costs P500 and can be ground ten times, a set of unsharpened
alloy steel costs P850 and can be ground five times. Which type of steel
should be used?
Assignment:
1. An industrial engineer has designed two alternative methods for
accomplishing a production job. Both methods involve the acquisition of the
same working place and other capital equipment to be used for this job only.

Method A calls for a crew consisting of three men each costing P30.00 per
hour. This method will result in the production of 16 units per hour of which
four will be rejects.

Method B calls for a crew of two men each costing P35.00 per hour should
result in the production of ten units per hour of which two will be rejects.

The cost of the direct material lost in each reject is P20.00. If a certain total
number of units is to be produced, find which method is economical.
Assignment:
2. An executive receives an annual salary of P600,00 and his secretary a
salary of P180,000. A certain task can be performed by the executive
working alone in 4 hours. If he delegates the task to his secretary it will
require him 1 hour to explain the work and another 30 minutes to check the
finished work. Due to the unfamiliarity of the secretary to do the task, it
takes her an additional time of 3 hours after beings instructed. Considering
salary cost only, determine the cost of performing the task by each method,
if the secretary works 2,400 hours a year and the executive 3,000 hours a
year.