Introduction to Engineering Economics Unit I MG6863

Introduction to Engineering Economics
• Engineering – It is an activity in which
materials are acted upon by forces of nature
for getting something beneficial for mankind
Resources By different Steps End product
Balamurugan.S Assistant Professor AAA College of Engg. & Tech

Engineering Economics
• Engineering deals with materials & forces of
nature with economical use for the benefit of
mankind.
• Need
– Resource & Energy crisis
– Stiff Competition in the market
Success company knows
– what the customer wants?
– How can economize the product?
Balamurugan.S Assistant Professor AAA
College of Engg. & Tech

Working Environment - Engineer
Physical
Environment
(Engineers
concern)
ENGINEERING Production / Construction
Economic
Environment
(Sales &
Administrative)
Total Environment
Assessing the worth of these
products/services in economic terms
Produce products and services based
on physical laws (e.g. Newton’s Law)
Earlier days = Physical Economic
Nowadays = Economic PhysicalBalamurugan.S Assistant Professor AAA

Utility vs Value
• Changes with time
• By altering the physical
environment, utility increases
• Vary from person to person
Customer – Price paid for the item
Designer – equates the value with reliability
Production person – what it costs to
manufacture

Flow in an Economy

Law of Supply and Demand
• Price decreases =
Demand increases,
Supply Decreases
• Equilibrium point,
Quantity of Supply =
Quantity of Demand
Factors influencing Demand
1. Income of the people
2. Prices of related goods (TV ,
VCD)
3. Taste of customers (Diabetes ,
Sugar free products)
Factors influencing Supply
1. Cost of the inputs (Agriculture, less
area / Fertilizer & Labour cost)
2. Technology ( New machine , Long run)
3. Weather ( Sweater)
4. Prices of related goods (TV , VCD)Balamurugan.S Assistant Professor AAA

Concept of Engineering Economics
• Price plays a major role in deciding the
demand & supply
• Organization point of view,
– Efficient & effective functioning of the
organization would help it to provide
goods/services at a lower cost. (Fix lower cost for
its goods)

Efficiency
• Technical Efficiency (%) =
𝑂𝑢𝑡𝑝𝑢𝑡
𝐼𝑛𝑝𝑢𝑡
× 100
If it is a Diesel Engine,
• Technical Efficiency (%)
=
𝐻𝑒𝑎𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑜𝑓 𝑚𝑒𝑐𝑕𝑎𝑛𝑖𝑐𝑎𝑙 𝑒𝑛𝑒𝑟𝑔𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐻𝑒𝑎𝑡 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑜𝑓 𝑓𝑢𝑒𝑙 𝑢𝑠𝑒𝑑
× 100
• Can never be more than 100 %
• Economic Efficiency (%) =
𝑊𝑜𝑟𝑡𝑕
𝐶𝑜𝑠𝑡
× 100
• Worth – Annual revenue generated
• Cost – Total annual expenses
• Survival & Growth of any business, it should be more than 100%

Economic Efficiency
• Economic Efficiency = Productivity
Ways to improve productivity
1. Increased output for the same input (Steel plant, Altering Layout, Location of Billet
Making Section, Closer to furnace, Scale formation in top of the ladle reduced)
2. Decreased input for the same output (Substitute Raw Material at Low cost, Purchase
Department)
3. Less proportionate increase in output is more than of the input (Surplus facility, New
product from same facility, Increase in revenue in addition to existing product > Increase
in Material Cost). Net Productivity ratio Increases.
4. When proportionate decrease in input is more than that of output (New
Uneconomical product from same Facility, Decrease in revenue < decrease in material,
operation, maintenance cost) Net Productivity ratio Increases.
5. Simultaneous increase in output and decrease in input (Automation Robot, initial
cost high, drastic reduction in operation cost, long run, increase in revenue, decrease in
input, No fatigue) Net Productivity ratio Increases at Faster rate.

Variable cost varies with the volume of production, over head is fixed.
Variable cost = Direct material, labour, expenses.
Overhead cost = Aggregate of indirect material, labour, expenses.
Administration overhead = costs for administering the business
Sales overhead = Promotional Activities, Distribution overhead = cost for shipping from
factory to customer Balamurugan.S Assistant Professor AAA

Selling Price of a Product
1. Direct Material + Direct Labour + Direct Expenses = Prime cost
2. Prime cost + Factory overhead = Factory cost
3. Factory cost + Administrative overhead = Cost of production
4. Cost of production + Opening finished stock – Closing finished stock = Cost of
goods sold
5. Cost of goods sold + Selling & distribution overhead = Cost of sales
6. Cost of sales + Profit = Sales
7. Sales / Quantity of sold = Selling price per unit
• If Opening finished stock = Closing finished stock, then Cost of production
= Cost of goods sold

Other costs
• Marginal cost ( Volume (V) & Cost (X)
– Benefit of mass production
– Cost of production 20 units(V1) = Rs.10,000 (X1)
– Cost of production 21 units(V2) = Rs.10,045(X2)
– Marginal cost of producing the 21st unit is Rs.45 (X2-X1)

Other costs
• Marginal Revenue
– Additional Revenue
– Revenue of selling 20 units = Rs.15,000
– Revenue of selling 21 units = Rs.15,085
– Marginal revenue of selling 21st unit is Rs.85

• Average Cost
Avg.Cost / unit
=
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑖𝑛𝑔 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
𝑉𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
Sunk Cost
it is the past cost of an equipment / asset.
Assume a Machine purchased for 1,00,000rs about 3 years back,
now the present value is not 1,00,000rs.
Present value of the equipment should be taken for the analysis.
Other costs

Other costs
• Opportunity Cost
– Shares & Real estate
– Example, Invested sum of Rs.50,000
– If share means, the annual return Rs.4,500
– If real estate means, return of 10% expected,
annual return Rs.5,000.
– Return in share < Return in Real Estate

Other costs
• Life cycle cost

Elementary Economic Analysis
• Decision making done by Simple Economic
Analysis
Concept of Simple Economic Analysis
1. Material Selection for a product
2. Design selection for a product
3. Design selection for a process industry
4. Building material selection for construction
activities
5. Process Planning / Process Modification

Material Selection for a product
• Substitution of Raw material
– Reduce the cost of the product
– Cheaper raw material price
– Reduced machining /process time
– Enhanced durability of the product
Example Problem – Economics book Pg.No-25
Jet engine Part, Aluminum vs Steel

• Design selection for a product
– Design is an important factor which decides the cost of the product
for a specified level of performance of that product.
– Proper design selection leads to (i) Reduced raw material
requirements (ii) Increased Machinability (iii) Reduced Labour
– Example Economics book Pg.No-28
– Tapered Fastening Pin
– Two Designs A & B, select the economic design

• Design selection for a process industry
– Reduce the cost by choosing the best design from
the alternatives
– Refinery Operations, Process Vessel Design

• Building material selection for construction activities
– Price of the raw material is location dependent.
– If the location is Remote area, then Transportation cost is more.
– Window Frame
– Aluminium Window Frame vs Steel Window Frame

• Process Planning / Process Modification
– Process sequence of a component is not static.
– Modification of sequence to minimize the cost pf
manufacturing
– Objective – To identify the most economical
sequence of operations.
Example - Economics book Pg.No-31
Identify the best process sequence

Steps in Process Planning
1. Analyze the part drawing to get an overall picture of
what is required.
2. Make recommendations to or consult with product
engineers on product design changes
3. List the basic operations required to produce the part
to the drawing or specifications
4. Determine the most practical and economical
manufacturing method and the form or tooling
required for each operation
5. Devise the best way to combine the operations and
put them in sequence
6. Specify the gauging required for the process

Introduction to Engineering Economics Unit I MG6863

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Introduction to Engineering Economics Unit I MG6863

Similar to Introduction to Engineering Economics Unit I MG6863 (20)

More from Balamurugan Subburaj

More from Balamurugan Subburaj (18)

Recently uploaded

Recently uploaded (20)

Introduction to Engineering Economics Unit I MG6863