GATEWAY Engineering Economics Principles and Concepts Department of

GATEWAY Engineering Economics Principles and Concepts Department of Mechanical Engineering, The Ohio State University Sl. #1

GATEWAY Historical Background · The Economic Theory of Railway Location - One of the first books on Engineering Economics - Published in 1877 · Arthur M. Wellington, Author - Appalled by lack of effort railway engineers made in considering the effect of location on cost and revenues - Defined engineering as: “The art of doing well for one dollar what any bungler can do for two” -A. M. Wellington Department of Mechanical Engineering, The Ohio State University Sl. #2

GATEWAY Understanding Cost · · Cost should be considered in any engineering design situation Types of costs include: - · Initial Costs Operating Costs Maintenance Costs Product Liability Costs Cost of Capital (Interest Lost) Sound economic decisions are key to profit Department of Mechanical Engineering, The Ohio State University Sl. #3

GATEWAY Basic Principle of Cost Analysis · Choosing the “best” approach from a number of alternate approaches · Conceptual designer: must choose the “best” approach by evaluating performance and cost factors · Analytical Designer: Concerned with optimizing the system after the appropriate approach is selected Department of Mechanical Engineering, The Ohio State University Sl. #4

GATEWAY Time Value of Money · · Cost is a major determining factor in engineering decisions Time value cannot be neglected when comparing alternate methods of accomplishing a task Department of Mechanical Engineering, The Ohio State University Sl. #5

GATEWAY Example: · Existing company is manufacturing a new product expected to make $200, 000 /year. Set costs $85, 000 /year · Method A · Semi-Automatic Machines $250, 000 ‘Out-of-pocket’ expenses $50, 000 Machine Life span: 10 years · Method B Fully-Automated machines $400, 000 ‘Out-of-pocket’ expenses $30, 000 Machine Life span 10 years Department of Mechanical Engineering, The Ohio State University Sl. #6

GATEWAY Analysis: Method A Gross Income from sale Marketing, Distribution, Material, etc. Labor, Maintenance, Power, etc. Depreciation (machine lasts 10 years) Total Annual Cost $200, 000 $ 85, 000 $ 50, 000 $ 25, 000 ($160, 000) Profit (Income – Cost) $ 40, 000 Department of Mechanical Engineering, The Ohio State University Sl. #7

GATEWAY Analysis: Method B Gross Income from sale Marketing, Distribution, Material, etc. Labor, Maintenance, Power, etc. Depreciation (machine lasts 10 years) Total Annual Cost $200, 000 $ 85, 000 $ 30, 000 $ 40, 000 $155, 000 Profit (Income – Cost) $ 45, 000 Department of Mechanical Engineering, The Ohio State University Sl. #8

GATEWAY Method A v. s. Method B · · Initial investments between the methods varies by $150, 000 This amount could be invested to earn more money - At 8%, it can accrue an additional $12, 000 / year! · This increases the annual profit of Method A to $52, 000! Department of Mechanical Engineering, The Ohio State University Sl. #9

GATEWAY Lesson to be Learned · · Money Earns Money! Question to ask is: “Will it earn a bigger profit here or somewhere else? ” Department of Mechanical Engineering, The Ohio State University Sl. #10

GATEWAY Cost Comparison Method A Out-of Pocket expenses Deprecation Interest (8%) Total Cost $ $ 50, 000 25, 000 20, 000 95, 000 Profit (Cost B – Cost A) Method B $ 30, 000 $ 40, 000 $ 32, 000 $102, 000 $ 7, 000 Department of Mechanical Engineering, The Ohio State University Sl. #11

GATEWAY Importance of Profit · Profits and Jobs are inseparable - John H. Batten - Former president of Twin Disc Inc. Racine, Wisconsin · · “Profits build factories… and support the cost of Research and Development…” “Profit is the food by which a company lives…” Department of Mechanical Engineering, The Ohio State University Sl. #12

GATEWAY Conceptual vs. Analytical Design · Conceptual Designers are interested in feasibility of the product · Analytical Designers are concerned with 1) Detail Costs 2) Initial Cost 3) Overall or Life Cycle Costs Department of Mechanical Engineering, The Ohio State University Sl. #13

GATEWAY Cost Analysis and Analytical Design · Selling Price · Initial Costs - Labor, material, amortization costs, overhead (labor, material), · Overall Cost · Operating Costs - Power, maintenance Department of Mechanical Engineering, The Ohio State University Sl. #14

GATEWAY Concerns for the Analytical Designer · Must consider financial ramifications - Warranty Costs, Funding · Optimal decisions that affect IC and OC of design must be made - Materials Method of Manufacture Types of Fastening/ Finishing methods Selection of Purchased Components etc. Department of Mechanical Engineering, The Ohio State University Sl. #15

GATEWAY Effectiveness · Maximize [Effectiveness : Cost] ratio · Partial List - Cam & Follower - Rack & Pinion - Power Screw (or ballscrew) - Slider-Crank Department of Mechanical Engineering, The Ohio State University Sl. #16

GATEWAY Important Ratios to Consider · · Effectiveness : Cost Mechanical Efficiency : Cost Product Life : Cost Power : Pound (weight) : Dollar Department of Mechanical Engineering, The Ohio State University Sl. #17

GATEWAY View of the Conceptual Designer · Must take a more broad view with management - Apply economic principles, fiscal techniques to estimate value of new project · Partial List 1. 2. 3. 4. 5. Time value of money Tax accounting methods Depreciation methods Sinking fund analyses Percent Rate-of-Return on investment Department of Mechanical Engineering, The Ohio State University Sl. #18

GATEWAY Cost Savings and Analytical Design · · · Necessary to obtain high performance at a low cost ‘Value’ includes safeguards to minimize risks to the consumer Cost Awareness is KEY Department of Mechanical Engineering, The Ohio State University Sl. #19

GATEWAY Possible Areas for Cost Savings… · · · · Selection of Materials Choice of Fits/ Tolerances Type of Bearings Quality of Noise and Thermal insulation Degree of Precision Quality of Surface Finish Type/Amount of Plating/ Painting Department of Mechanical Engineering, The Ohio State University Sl. #20

GATEWAY Achieving Economies in Manufacturing Operations · Company A - Foundry · · · Company B - Forging Facility ‘A’ should cast a crankshaft for ‘B’ to forge Considerations - Material Cost - Production Equipment -Volume of Production -Tooling Cost Department of Mechanical Engineering, The Ohio State University Sl. #21

GATEWAY Design Review 1. Will the material specified be the most economical for 2. 3. 4. 5. the part? Can the part be fabricated at an adequate production rate? Will the physical shape lend itself to processing at the minimum cost and an adequate rate or volume of production? Do dimensional tolerances permit selection of the most economical production methods? Is the part design based on consideration of scheduled production volume? Department of Mechanical Engineering, The Ohio State University Sl. #22

GATEWAY Selection of Manufacturing Processes · · Dependent on volume of production and market life Three Categories 1. One-of-a-kind (Custom part) 2. Low-volume manufacturing, ( < 250, 000 units/year) 3. High-volume manufacturing, ( >250, 000 units/year) Department of Mechanical Engineering, The Ohio State University Sl. #23

GATEWAY Selling Price Analysis · Based on a ‘Simple System’ - Small number of components · Complex system components must be arranged in sub-systems · Basic method of analysis to be described can be applied to any system Department of Mechanical Engineering, The Ohio State University Sl. #24

GATEWAY Production Cost · · · Direct Material Costs Direct Labor Costs Overhead (Material) Overhead (Costs) Unit Costs Direct Costs Department of Mechanical Engineering, The Ohio State University Sl. #25

GATEWAY Additional Costs · Engineering and Drafting Labor Costs - Estimated by labor costs and labor hours - Management, Facility, Secretarial costs · Operating Costs - Issue faced by customer, not designer · Maintenance Costs - Warranty situations (Automotive Companies) Department of Mechanical Engineering, The Ohio State University Sl. #26

GATEWAY Miscellaneous and Administrative (M/A) Costs · · A factor applied to both production and E/D costs Applied to General Mfg. Overhead items: 1. 2. 3. 4. Advertisement market analyses warranty costs tax costs 5. Insurance (on equipment) costs 6. Cost of Money (interest lost) 7. Depreciation of Equipment 8. Administrative and Legal 9. Research Department of Mechanical Engineering, The Ohio State University Sl. #27

GATEWAY Initial Costs and Profit · · As mentioned earlier Total initial cost can be computed as Factor · IC’ can be calculated as *Production Costs include: Material Costs, Purchased parts, Labor Costs etc. Department of Mechanical Engineering, The Ohio State University Sl. #28

GATEWAY Overhead Factors Total Material Cost is or If IMC are 10% DMC, then Therefore, OVH on materials is 1. 1 Department of Mechanical Engineering, The Ohio State University Sl. #29

GATEWAY Profit · · Profit normally varies between 5% and 28% of initial cost (IC) This margin varies with several factors - Risk - Competition - Image · Selling Price can be reduced to Department of Mechanical Engineering, The Ohio State University Sl. #30

GATEWAY Example: Estimation of Selling Price Requirements · Wheel-less dolly · Air-Cushion Principle · Low Cost · Light Weight · Carry 1000 lbs · Constraints · Intake air must be used to accomplish floor sweeping · Main source: 220 V, 60 cycle, 3 -phase line Assumption: Cost based on annual production of 10, 000 units Department of Mechanical Engineering, The Ohio State University Sl. #31

GATEWAY Example: continued · Production costs can be obtained from reference tables - i. e. Material Costs, Purchased parts, Direct Labor costs - Recall · Selling Price can be calculated as Department of Mechanical Engineering, The Ohio State University Sl. #32

GATEWAY Example: Continued · Given: - · · Direct labor costs: 26 hrs. x $4. 50/hr. = $117 / unit Direct material costs = $94. 95/unit Cost of purchased components = $71. 52/unit OVH labor, mat’l, purchased parts ~ 1. 1 ICT = ($117+$94. 95+$71. 52))*1. 1 SP = ($128. 72)*1. 2 = $ 154. 46/unit Department of Mechanical Engineering, The Ohio State University Sl. #33

GATEWAY Concluding Remarks · Basic equations of engineering economics are fairly simple · Engineering Economic principles are essential when undertaking any engineering project. · Money will always be a constraint— learning economic practices now will put you ahead of the game! Department of Mechanical Engineering, The Ohio State University Sl. #34

GATEWAY Credits · This module is intended as a supplement to design classes in mechanical engineering. It was developed at The Ohio State University under the NSF sponsored Gateway Coalition (grant EEC 9109794). Contributing members include: · Gary Kinzel…………………. Project supervisors Amita Danak. . ………………. . . Primary authors L. Pham …………………. …. . Audio voice · · Reference: K. J. Waldron, A. T. Conlisk, K. Ishii and T. G. Foster. Mechanical Design, Course Notes. The Ohio State University. Columbus, OH © 1999 Department of Mechanical Engineering, The Ohio State University Sl. #35

GATEWAY Disclaimer This information is provided “as is” for general educational purposes; it can change over time and should be interpreted with regards to this particular circumstance. While much effort is made to provide complete information, Ohio State University and Gateway do not guarantee the accuracy and reliability of any information contained or displayed in the presentation. We disclaim any warranty, expressed or implied, including the warranties of fitness for a particular purpose. We do not assume any legal liability or responsibility for the accuracy, completeness, reliability, timeliness or usefulness of any information, or processes disclosed. Nor will Ohio State University or Gateway be held liable for any improper or incorrect use of the information described and/or contain herein and assumes no responsibility for anyone’s use of the information. Reference to any specific commercial product, process, or service by trade name, trademark, manufacture, or otherwise does not necessarily constitute or imply its endorsement. Department of Mechanical Engineering, The Ohio State University Sl. #36