ME 443
Engineering Economy and
Production Management
Prof. Dr. S. Engin KILIÇ
Middle East Technical University
Department of Mechanical Engineering
Office: B-305 Tel: 210 25 70
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Title Page
ME 443 i
2009 Fall
Content
Chapter 1 :
Chapter 2 :
Chapter 3 :
Chapter 4 :
Chapter 5 :
Chapter 6 :
Chapter 8 :
Chapter 7 :
Class Notes :
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Introduction
Cost Concepts
Time Value of Money
Measures of Worth
Comparison of Alternatives
Replacement Analysis
Depreciation
Sensitivity Analyses
Public Projects
Linear Programming
Large-Scale Project Planning
Course Content
ME 443
2009 Fall
2h
4h
10 h
3h
5h
3h
3h
3h
3h
4h
2h
ii
Content
•What is Engineering and Engineering
Economy?
•Principles for Decision-Making
•Decision-Making Process
•Present Economic Studies
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 1
2009 Fall
What is Engineering and
Engineering Economy?
•Engineering is the profession in which a knowledge of
mathematical and natural sciences gained by study,
experience and practice is applied with judgement to
develop ways to utilise, economically, the materials and
forces of nature for the benefit of mankind
•Engineering economy evaluates the monetary
consequences of the products, projects and processes that
engineers design
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 2
2009 Fall
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
ME 443
2009 Fall
What is Engineering and
Engineering Economy?
•It is the collection of mathematical techniques which
simplify economic comparisons
•It is a decision assistance tool to find the most economical
solution
•It uses mathematical formulas to account for the time
value of money and to balance current and future
revenues and costs
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 3
2009 Fall
Principles for Decision Making
•Common measure : all savings and losses must be
expressed in the same monetary units.
•Only differences matter : only the pertinent differences
between alternatives must be included in the cash flow
diagrams. Sunk costs should be ignored.
•Separable decisions should be made separately
•Adopt a systems viewpoint
•Use a common planning horizon
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 4
2009 Fall
Decision - Making Process
•Define problem
•Choose objective(s)
•Identify alternatives
•Evaluate consequences
•Select
•Implement
•Audit
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 5
2009 Fall
Present Economy Studies
•
Time value of money does not have to be considered:
study period is shorter than a year
•
Applicable conditions :
1.
–
–
–
2.
Revenues and other economic benefits are not present or are
constant among all alternatives: select alternative that
minimizes total cost per defect-free unit of output
no investment of capital, only out-of pocket costs are involved
long-term costs are the same for all alternatives or they are
proportional to first costs
alternatives have identical results regardless of capital
investment
Revenues and other economic benefits are present and vary
among alternatives: select alternative that maximizes overall
profitability based on the number of defect-free units of output
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 6
2009 Fall
Problems
1.1. In a certain manufacturing activity, 40 employees are
engaged in identical activities. The average output of the
group as a whole is 46.4 units/hour. The average output of the
less productive half is 40.2 satisfactory and 1.4 unsatisfactory
units per hour and the average of the more productive half is
52.6 satisfactory and 0.8 unsatisfactory units per hour. The
employees work on a straight piecework plan and receive
$3.30 per hundred satisfactory units. The firm sustains a loss
of $0.07 for each unsatisfactory unit. One machine is required
for each employee. Each machine has an annual fixed cost of
$320 and a variable cost of $0.18 per hour. Supervision and
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 7
2009 Fall
Problems
1.1. Cont.’d
other overhead costs are estimated at $720 per employee per
year. The average employee works 1900 hours per year. How
much could be paid annually for a selection, training and
transfer program which would result in raising the average
productivity of the entire group to 52.6 satisfactory and 0.8
unsatisfactory units per hour?
Solution:
FC=(320+720)x20=$20,800/year
VC=0.18x1900x20= $6,840/year
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 8
2009 Fall
Problems
1.1. Cont.’d Solution:
Before training:
Cost of succ. parts:
1900x20x(40.2x3.3)/100 = $50,410.80/year
Cost of unsucc. parts:
1900x20x1.4x0.07 = $3,724/year
Cost/part:
(20,800+6,840+50,410.80+3,724)/(1900x40.2x20)
= 5.35 cents
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 9
2009 Fall
Problems
1.1. Cont.’d Solution:
After training:
Cost of succ. parts:
1900x20x(52.6x3.3)/100 = $65,960.40/year
Cost of unsucc. parts:
1900x20x0.8x0.07 = $2,128/year
Cost/part:
(20,800+6840+65,960.40+2,128)/(1900x52.6x20)
= 4.79 cents
Money which can be spent yearly for increased productivity:
(5.35-4.79)x1900x20x52.60/100 = $ 11,193
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 10
2009 Fall
Problems
1.2. Either aluminium alloy or stainless steel will serve equally
well in a certain corrosive environment. Aluminium alloy has a
yield strength of 155MPa and stainless steel has a yield strength
of 256MPa. The aluminium alloy will cost $1.50/kg and the
stainless steel will cost $2/kg. The specific gravities of
aluminium alloy and stainless steel are respectively 2.8kg/dm3
and 7.8kg/ dm3. If selection is based upon yield strength, which
material will be more economical?
Solution:
In order that both materials carry the same amount of load:
155AAl = 256ASt
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 11
2009 Fall
Problems
1.2. Cont. solution:
If AAl = 1
WAl = 2.8
Cost of Al / length:
1.5x2.8 = $4.20
ASt = 155/256
WSt= (155/256)x7.8
Cost of Steel/length:
(155/256)x7.8x2 = $9.44
Hence, Al is more economical.
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 12
2009 Fall
Problems
1.3. In connection with surfacing a new highway, the contractor
has a choice of two sites on which to set up his asphalt-treating
equipment. He will pay a subcontractor $0.10 per cubic meter
per kilometre for hauling the mixed material from the mixing
plant to the job site. Factors relating to the two sites are as
follows:
Site A
Site B
Average hauling distance
6km
4km
Monthly rental
$100
$500
Cost to set up and remove equipment
$1,500
$2,500
If site B is selected, there will be an added charge of $36/day for
a flagman.
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 13
2009 Fall
Problems
1.3. Cont.
The job involves 50,000 cubic meters of mixed material. It is
estimated that 4 months (17 weeks of 5 working days per week)
will be required for the job.
Solution:
The relevant costs for the two sites can be tabulated as follows:
Site A
4x$100 = $ 400
1,500
Rental
Set-up cost
Flagman
Hauling 50,000x$0.10x6 = 30,000
TOTAL
$31,900
Hence, Site B is more economical
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Site B
4x$500 = $ 2,000
2,500
5x17x$36 = 3,060
50,000x$0.10x4 = 20,000
$27,560
Chapter 1: Introduction
ME 443 1. 14
2009 Fall
Problems
1.4. A manufacturing plant consists of three departments: A, B,
and C. Department A occupies 100m2 in one corner of the plant.
Product X is one of several products being produced in
Department A. The daily production of X is 576 pieces. The
cost accounting records show the following average daily
production costs for X:
Direct labor (1 operator working 4 hours per day at
$22.5/hr, including fringe benefits, plus
a part-time foreman at $30 per day)
$120.00
Direct material
86.40
Overhead
(at $0.82 per m2 of floor area)
82.00
Total cost per day
$288.40
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 15
2009 Fall
Problems
1.4. Continued
There is an outside company that sells X at $0.35 per piece.
Hence the daily cost would be $0.35(576) = $201.60, resulting a
daily savings of $288.40-$201.60 = $86.80. Buy alternative
therefore seems to be more atractive than producing X in the
plant.
Engineering Economy and
Production Management
METU, Mech. Eng. Dept.
Chapter 1: Introduction
ME 443 1. 16
2009 Fall