EME 3056 Industrial Management

Engineering Economy Tutorial 1

1. A company produces circuit boards used to update outdated computer equipment. The fixed
cost is $42,000 per month and the variable cost is $53 per circuit board. The selling price per
unit is p = $150 0.02Q. Maximum output of the plant is 4,000 units per month.
a. Determine optimum quantity for the product.
b. What is the maximum profit per month?
c. At what volume does breakeven occurs?
d. What is the company range of profitability demand?
[2,425units, $75,612.50, 481-4,369 units]
2. Suppose we know that p = 1,000 Q/5, where p = price in dollars and Q = annual demand.
The total cost per year can be approximate by $1,000 + 2Q2.
a. Determine the value of Q that maximizes profit.
b. Show that the profit has been maximized rather than minimize.
3. A large wood product company is negotiating a contract to sell plywood overseas. The fixed
cost that can be allocated to the production of plywood is $900,000 per month. The variable
per thousand board feet is $131.50. The price charged will be determined by p = $600
0.05Q per thousand board feet.
a. For this situation, determine the optimal monthly sales volume for this product and
calculate the profit (or loss) at the optimal volume.
b. What is domain of profitability quantity (demand) during a month?
[P2.14: $197,461.25, 2,698 6,672 units]
4. A company produces and sells a consumer product and is able to control the demand for the
product by varying the selling price. The approximate relationship between price and demand

, ,
is p = $38 +  -  ; Q>1. The company is seeking to maximize its profit. The fixed cost
is $1,000 per month and the variable cost is $40 per unit.
a. What is the number of unit that should be produced and sold each month to maximize
profit?
b. Show that your answer in a. is profit maximization.
[P2.15: 50 units]
5. Suppose that the ABC Corporation has a production (and sales) capacity of 4,100 hydraulic
pumps per month. The fixed costs-over a considerable range of volume-are $504,000 per
month. The variable cost is $166 per pump, and the sales price is $328 per pump. Assume that
there is infinite market demand.
a. What is the monthly breakeven point (Q)?
b. What would be effect (reduction in percentage) on Q if the fixed costs are reduced by
18% and unit variable costs by 6%.
[P2.18: 3,112 pumps, 22.75%]

6. A plant operation has fixed costs of $2,000,000 per year, and its output capacity is 100,000
electrical appliances per year. The variable cost is $40 per unit and the product sell for $90
per unit.
a. Construct the economy breakeven chart.
b. Compare annual profit when plant is operating at 90% of capacity with the plant is
operating at full capacity. Assume that the fist 90% of capacity output is sold ad $90 per
unit and the remaining 10% of production is sold at $70 per unit.
[P2.20: 40,000units, $2.5M, $2.8M]
7. A farmer estimates that if he harvests his soybean crop now, he will obtain 1,000 bushel,
which he can sell at $3.00 per bushel. However, he estimate that this crop will increase by an
additional 1.200 bushels of soybeans for each week he delays harvesting, but the price will
drop at $0.50 per bushel week. In addition, it is likely that he will experience spoilage of
approximately 200 bushels per week for each week he delays harvesting. When should he
harvest his crop to obtain the largest net cash return, and how much will be received for his
crop at that time?
[P2.25: $6,125]
8. The speed of your automobile has a huge effect on fuel consumption. Travelling at 65 miles
per hour (mph) instead of 55mph can consume almost 20% more fuel. As a general rule, for
every mile per hour over 55 you lose 2% in fuel economy.
For example, if your automobile gets 30 miles per gallon at 55mph, the fuel consumption is
21 miles per gallon at 70mph.
If you take a 400-mile trip and your average speed is 80mph rather than the posted speed
limit of 70mph, what is the extra cost of fuel if gasoline costs $3.00 per gallon? You car gets
30 miles per gallon (mpg) at 60mph. What is the reduce time? Is this a good trade off?
[P2.37: $16.67, ~45min]

9. The following results were obtained after analysing the operational effectiveness of a
production machine at two different speeds:
Speed
Output
Time between Tool Grinds
(Pieces per hour)
(Hours)
A
400
15
B
540
10
A set of unsharpened tool costs $1,000 and can be ground 20 times. The cost of each grinding
is $25. The time required to change and reset the tools is 1.5 hours, and such changes are
made by a tool-setter who is paid $18/hour.
The production machine operator is paid $15/hour, including the time that the machine down
for tool sharpening. Variable overhead on the machine is charged at the rate of $25/hour,
including tool-changing time. A fixed-size production run will be made (independent of
machine speed).
a. At what speed should the machine be operated to minimize the total cost per piece?
[P2.38: $0.127, $0.104, Speed B]

10. Either tool steel or carbon steel can be used for the set of tools on a certain lathe. It is
necessary to sharpen the tools periodically. Relevant information is shown in table.

Output at optimum speed

Time between tool grinds
Time required to change tools
Cost of unsharpened tools
Number of time tools can be ground

Carbon Steel
100 pieces/hour
3 hours
1 hour
$400
10

Tool Steel
130 pieces/hour
6 hours
1 hour
$1200
5

The cost of the lathe operator is $14.00 per hour, including the tool-changing time during
when he is idle. The tool changer costs of $20.00 per hour for just the time he is changing
tools. Variable overhead costs for the lather are $28.00 per hour, including tool-changing
time. Which type of steel should be used to minimize overall cost per piece?
[$0.76, $0.71, tool steel]

11. Suppose you are a mechanical engineer faced with the problem of designing a rigid
coupling that will be used to join two odd-sized instrument shafts for a special customer
order. Only 40 couplings will be produced, and there is no reason to suspect that there will
be a repeat order in the near future. The coupling is fairly simple and can be turned from
round steel lord stock. The manufacturing engineering department indicates that two
machining methods are available. The following table summarizes the data for the metal
lathe production and the automatic screw production alternatives for the rigid coupling.

Production rate
Machine charge
Setup charge (Labour)
Operating charge (Labour)
Material cost
Inspection cost

Lathe
4 pieces / hour
$5 / hour
$15 / hour
Same
Same

Automatic Screw Machine

18 pieces / hour
$25 / hour
$15
$12 / hour
Same
Same

Since an automatic screw machine is a more complex and versatile device than a turret
lathe, it is not surprising that its hourly cost is higher. A skilled machine operator is needed
to operate a lathe, whereas a less-skill machine operator tends the automatic-screw machine.
The setup charge for the screw machine is to pay for the services of a highly skilled setup
man who initially adjust its operation. The operator then keeps it supplied with raw
material. Raw material and inspection cost would be independent of the method of
production. The actual cutting tools for an automatic screw machine would be independent
of the method of production. The actual cutting tools for an automatic-screw machine
would probably be more expensive than those for a lathe. For this short run (40 units),
however, tool wear will be negligible and this cost can be ignored.
a. Compute the cost of producing the coupling by each method.
b. How does cost per part vary with number of items produced? Draw a graph to illustrate
your answer.
[$200, $97]

12. In the design of an automobile radiator, an engineer has a choice of using either a brass
copper alloy casting or a plastic moulding. Either material provides the same service.
However, the brass copper alloying casting weighs 25pounds, compare with 20 pounds of
the plastic moulding. Every pound of extra weight in the automobile has been assigned a
penalty of $6 to account for increased fuel consumption during the life cycle of the car. The
brass copper alloy casting costs $3.35 per pound, whereas the plastic moulding costs $7.40
per pound. Machining costs per casting are $6.00 for the brass-copper alloy. Which material
should the engineer select, and what is the difference in unit costs?
[$119.75, $148, brass-copper alloy]

13. A Company is analysing a make-versus-purchase situation for a components used in several

products, and the engineering department has developed the following date:
Option A
Option B
Purchase 10,000 items per year at a fixed Produce10,000 items per year, using
price of $8.50 per year. The cost of
available capacity in the factory. Cost
placing the order is negligible according
estimates are direct material ($5/item),
to the present cost accounting procedure.
direct labour ($1.50/item). Manufacturing
overhead is estimated at 200% labour
cost.
a. Based on the data, should the item be purchased of manufactured?
b. If the manufacturing overhead can be traced directly to the item, and it amount to
$2.15/item. Traceable overhead associated with purchasing this item (vendor
certification, benchmarking, etc.) is $0.50 per item. What is the best alternative?
c. There is reject rate of 2.5% if the company manufactured the items. If the overhead cost
remains as b, which alternative should be selected?
[a:purchase, b:manufacture]