Sheet 2 Engineering Economy 2018-2019

SHEET 2 ENGINEERING ECONOMY 2018-2019
Comparison Between Alternatives and Breakeven analysis
Q1 : Compare the following machines using i=12%per year.

Machine A Machine B
First cost $ 44K 23K
Annual operating cost $ 7K 9K
Annual repair cost $ 210 350
Overhaul maint. cost every 2 years --- 1.9K
Overhaul maint. cost every 5 years 2.5K ----
Salvage value $ 4K 3K
Life in years 14 7
Ans: AW (A)=$14060 , AW(B)=$14900 --Select A.
Q2: The supervisor of swimming pool is trying to decide between two methods for adding CHLORIDE.
Method 1 :
By using gaseous Chloride device :
Initial cost of device $ 8K
CHLORIDE cost annually $ 200
Labour cost per year $ 400
Life in year 5
Method 2 :
By adding DRY CHLORINE manually
CHLORINE cost annually $ 500
Labour cost per year $ 1500
_________________________________________________
Which method should be selected ? use i= 8 % per year.
Ans: AW(1)= $ 2604 , AW(2)=$ 2000 ----- Select manual method.
Q3: Compare the alternatives. The index X goes from 1 to 10 years . Using i= 14%
Plan A Plan B
First cost $ 28K 36K
Installation cost $ 3K 4K
Annual maint. cost $ 1K 2K
Annual operating cost $ 2200+75X 800+50X
Life year 5 10__________________
Ans: AW(A)=$12436 AW(B)=$10691 SELECT B.
-1-
SELECTED PROBLEMS ON BREAKEVEN ANALYSIS
OF ONE ALTERNATIVE
Q4 : A company which sells water purifiers has the following Fixed cost and Variable cost
components for its product over 1 year period.
Fixed cost Variable cost $/uint

Administrative $ 10K Material 5
Lease cost $ 20K Labour 3
Insurance $ 7K Indirect labour 5
Utilities $ 3K others 20
Others $ 60K_______________________________
(a) Determine the price (r $/unit) required to Breakeven if the estimated Q (BE) is 5000 units.
(b) Then , if additional 3000 units can be sold, determine the total profit using the result in (a).
Ans: r = 53 $/unit , 60000 $/year
Q5 : The manufacturer of children TOYS has a capacity of 200000 units annually . If the Fixed cost
of the production line is $300K/ year, with Variable cost $3/ unit and selling price is 5 $/unit :
(a) Find the % of capacity that must be used to break even .
(b) If the factory decide to reduce its capacity 10% ,and the variable cost can be reduced to be
2.5 $/unit, is the factory will increase or decrease its Profit in this situation ? Draw the curves
for explanation. Ans : 75% , Increase to 150000 $/year
Q6 : The XYZ company produce certain plastic item which can be sold by 0.3 $ /unit . The
machine required in the operation is costs $ 1400 with 8 year life and no salvage value .
The costs of production as shown in schedule :
Fixed cost $/year Variable cost $/unit

Insurance & tax 34 ---
Maintenance 22 0.005
Material cost --- 0.095
Operating cost( labour & power …) --- 0.110
(a) Find the breakeven quantity.

(b) Determine the profit if the factory produce 10000 item.
© Explain how you can increase the profit for this factory? Ans: Q(BE) =3333 items , 600 $/year
Q7 : If a breakeven Revenue is 1 million dollar and fixed cost is $ 400,000 for an items produced
in certain company :
(1) Compute the Contribution margin CM % .
(2) compute the selling price r in $ /unit if variable cost ( V= $12/unit) .
(3) suppose 80,000 units are sold , compute the profit , CM , Revenue .
Solve with CVP and PV graphs explanation.
Ans : 40% , r = 20 $/unit , $240000 , $ 640000 , $ 1,600,000 .
-2-
SELECTED PROBLEMS ON BREAKEVEN ANALYSIS
OF TWO ALTERNATIVE
Q8
An Engineering company can purchase a computer for $ 30000. It is estimated that the life and
salvage value will be 6 year and $ 4000 respectively.
Operating expenses are estimated to be $ 50 per day , and the maintenance will be performed under
contract for $ 3000 per year .
As an alternative , sufficient computer time can be rented at an average cost of $ 130 per day .
How many days per year can the two alternatives be breakeven? i=12% per year.
Ans : 123 days per year.
Q9:
Machine A costs $ 200 , has zero salvage value , and labour cost of product is $ 1.14 /unit .
Machine B costs $ 3600 has zero salvage value , and labour cost product is $ 0.83/ unit .
If the annual rate of production is 3000 units, in how many years will the two machines will
breakeven in equivalent annual cost ? i= 10 % per year.
Ans : approximate 5 years.
Q10:
An electronic manufacturer is considering two methods for producing circuit boards. This board can be
hand wired at an estimated cost of $ 1.2 per unit and with annual equipment cost of $ 300 . A
printed equivalent of the required circuit can be produced with an investment of $ 4500
processing equipment which will have an expected life of 9 years and salvage value of $ 150 .
It is estimated that the labour cost will be $ 0.52 per unit , and $150 per year to maintain it .
How many circuit boards must be produced each year for the two methods to Breakeven in
equivalent annual cost ?
Solve with graph using i=10%. Per year. Ans: 912 unit/year
Q11:
A 3-phase , 220 –volt induction motor is to be used to drive a pump which will fill a series of storage
tanks. It is estimated that energy of 300(HP.hr ) will be required each day for 365 days per year.
Motors having the following characteristic may be leased:
operating cost
Size (hp) Lease $/year per ( h.p hr)
20 $ 928 $ 0.044
40 1000 0.037
75 1142 0.031
100 1250 0.027
150 1510 0.025
Plot the total yearly cost as a function of the size of the motor ,and select the size that will result in a
minimum cost per year .
Ans: select motor size 100 h.p which have min. cost of 4206 $/year.
-3-

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SHEET 2 ENGINEERING ECONOMY 2018-2019

Comparison Between Alternatives and Breakeven analysis

Q1 : Compare the following machines using i=12%per year.

Ans: AW(1)= $ 2604 , AW(2)=$ 2000 ----- Select manual method.

Fixed cost Variable cost $/uint

Fixed cost $/year Variable cost $/unit

(a) Find the breakeven quantity.

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