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Learning Objectives
• Distinguish between simple and complex problems
• Discuss role and purpose of engineering economic analysis
• Describe nine steps of economic decision-making process
• Select appropriate economic criteria for different problem types
• Solve simple engineering decision-making problems
Problem Complexity
• Can be classified by levels of difficulty:
– Simple (not much effort):
• e.g. If we use a machine three items per week, how many should we buy at a
time?
– Intermediate (primarily economic):
• e.g. Which machine should be purchased? Low-cost, requiring three operators or
high-cost, requiring only two operators?
Decision-Making Problem
1. Recognize the problem
– Starting point in rational decision-making is recognizing problem exists
– Problems can be previously unrecognized or only become apparent directly as result of
new situation
– Some firms establish programs to identify problems, e.g.:
• TQM: Total Quality Management
• CI: Continuous Improvement
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ENG 3000 Summer 2018
• Extra-market consequences
– Items with no direct marketplace price but for which price may be
assigned indirectly
– e.g. Cost of employee injury, value of employee going from five day to
four day week
• Intangible consequences
– Items that cannot be numerically priced
– e.g. potential loss of worker’s jobs due to automation, value of
landscaping around factory
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6. Construct a Model
– Various elements of problem brought together to help form solution
• e.g. loan consists of mathematical relationship between:
– Loan amount, Interest rate, duration and payments
– Constructing interrelationship = model building
• e.g. mathematical model of classroom student capacity:
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Ethics
• Need to distinguish between right and wrong in decision making
– Usually clear but there are ethical dilemmas
– Ethical dilemmas may arise in many situations including economic analysis
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• Environment:
– Large-scale projects typically involve some environmental impact
• How to account for these impacts?
• How to balance stakeholders with opposing viewpoints?
• How to set minimum standards?
Example 1
Problem
Assume a company with the following average monthly costs for its three-person printing department.
The printing department charges the other departments for its services to recover its $18,000 monthly
cost. The charge to run 1,000 copies of an announcement is:
Another commercial printer prints the same 1,000 copies for $22.95. If the shipping department needs
about 30,000 copies printed a month, which printer should the department use?
Solution
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The allocation of indirect costs may be misleading for decision-making. As shown on above table,
shipping department would reduce cost from $793.50 to $688.50. What about printing department’s
costs?
Direct labour: if the printing department works overtime, then overtime would be reduced or
eliminated. But assuming no overtime, it’s unlikely that a printer will be fired! Although there might
be a $228 saving, it’s more likely there will be no reduction in direct cost.
Allocated Overhead Costs: There will be no reduction as there will be no reduction in department
floor space (actually, there might be small reduction in company’s power costs).
The company will save $294 in materials and supplies and may or may not save $228 in direct labour if
the job is done by the outside printer. The maximum saving would be $522 and it would most probably be
$294. If the shipping department obtains printing from outside printer, the company will pay $668.50 a
month.
The shipping department should therefore use the printing department and not the outside printer.
Example 2
Problem
A concrete aggregate mix must contain at least 31% sand by volume for proper batching. Source A has
25% sand and 75% coarse aggregate and sells for $3 per cubic metre (m 3). Source B has 40% sand and
60% coarse aggregate and sells for $4.40/ m 3. Determine which source or blend of sources (in
percentage) will be used and its cost per cubic metre.
Solution
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Therefore, the blended aggregates will contain: 60% of source A and 40% of source B. The cost per cubic
meter of this blend is $3.56/m 3.
Example 3
Problem
A machine part is manufactured at a unit cost of 40¢ for material and 15¢ for direct labour. An investment
of $500,000 in tooling is required for this method.
A new method of manufacture is being investigated. This new method reduces unit costs to 34¢ for
material and 10¢ for direct labour. An investment of $600,000 in tooling would be required.
Both methods incur other costs that are 2.5 times the direct labour costs.
Assume an order call for 1.5 million pieces. Which of these two methods should be used?
Solution
Old method cost:
The newest method has the lowest cost. Therefore, it should be used.
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