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Present Economy Studies

Rules on Conducting Present Economy Studies
by

Emir Lenard Sicangco

on 17 June 2014

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Transcript of Present Economy Studies

Present Economy Studies
Present economy studies are engineering economic analyses where alternatives for accomplishing a specific task are being compared over
one year or less
and the influence of time on money can be ignored.

Two rules shall be followed in conducting present economy studies. These rules, or criteria, will be used to select the preferred alternative when defect-free output (yield) is variable or constant among the alternatives being considered.
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.

Present Economy Studies
Situations where Present Economy Studies are Involved
SITE SELECTION

Costs relevant to selecting sites must be carefully considered (land cost, construction cost, cost of available labor, cost of transporting equipment and materials)
Situations where Present Economy Studies are Involved
PROFICIENCY OF WORKERS

Bear in mind that workers have varying efficiency and proficiency

Worker proficiency can be translated into monetary values
Situations where Present Economy Studies are Involved
ECONOMY OF TOOL AND EQUIPMENT MAINTENANCE

Consider the costs of acquiring tools and equipment and the costs of maintaining them
Situations where Present Economy Studies are Involved
ECONOMY IN THE UTILIZATION OF PERSONNEL

Only a certain number of personnel will lead to the highest productivity; increasing this number will not cause a proportional increase in productivity
Situations where Present Economy Studies are Involved
MATERIAL SELECTION

Involves selection among materials available that will result in the most economical product and give the best results.
Situations where Present Economy Studies are Involved
SELECTION OF METHOD

Two or more different methods may give the same satisfactory results

Involves selection of the most economical way to accomplish operations
Situations where Present Economy Studies are Involved
SELECTION OF DESIGN

The design to be selected must be best suited for the work to be done with particular care being given to the one which will do the work with the utmost economy.
*MATERIAL SELECTION*
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 for each is shown below:
Carbon Steel Tool Steel
Output at optimum speed 100 pieces/hour 130 pieces/hour
Time between tool grinds 3 hours 6 hours
Time required to change tools 1 hour 1 hour
Cost of unsharpened tools $400 $1200
Number of times tools can be ground 10 5

The cost of the lathe operator is $14.00 per hour, including the tool-changing time during which he is idle. The tool changer costs $20.00 per hour for just the time he is changing tools. Variable overhead costs for the lathe are $28.00 per hour, including tool-changing time. Which type of steel should be used to minimize overall cost per piece?
Problem 1
*MATERIAL SELECTION*
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 for each is shown below:
Carbon Steel Tool Steel
Output at optimum speed 100 pieces/hour 130 pieces/hour
Time between tool grinds 3 hours 6 hours
Time required to change tools 1 hour 1 hour
Cost of unsharpened tools $400 $1200
Number of times tools can be ground 10 5

The cost of the lathe operator is $14.00 per hour, including the tool-changing time during which he is idle. The tool changer costs $20.00 per hour for just the time he is changing tools. Variable overhead costs for the lathe are $28.00 per hour, including tool-changing time. Which type of steel should be used to minimize overall cost per piece?
Problem 1
Problem 1
*SELECTION OF DESIGN*
Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.70 each. Either design will serve equally well and will involve the same material and manufacturing cost except for the lathe and drill operations.

Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally, there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling.

a. Which design should be adopted?
b. What is the annual savings over the other design if 125,000 units are sold each year?
Problem 2
Problem 1
*SELECTION OF METHOD*
Ocean water contains 0.9 ounce of gold per ton. Method A costs $220 per ton of water processed and will recover 85% of the metal. Method B costs $160 per ton of water processed and will recover 65% of the metal. The two methods require the same investment and are capable of producing the same amount of gold each day. If the extracted gold can be sold for $350 per ounce, which method of extraction should be used? Assume that the supply of ocean water is unlimited. Work on this problem on the basis of profit per ounce of gold extracted.
Problem 3
Problem 1
*SELECTION OF PROCESS*
A bicycle component manufacturer produces hubs for bike wheels. Two processes are possible for manufacturing, and the parameters of each process are as follows:
Process 1 Process 2
Production Rate 35 parts per hour 15 parts per hour
Daily Production Time 4 hours per day 7 hours per day
Percent of Parts Rejected 20% 9%
Based on Visual Inspection

Assume that the daily demand for hubs allows all defect-free hubs to be sold. Additionally, tested or rejected hubs cannot be sold.
Find the process that maximizes profit per day if each part is made from $4 worth of material and can be sold for $30. Both processes are fully automated, and variable overhead cost is charged at the rate of $40 per hour.
Problem 4
END OF LESSON
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