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Lecture 1 Part 2 - Present Economy

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PRESENT ECONOMY

Present Economy
• Involves the analysis of problems for manufacturing a product or rendering a
service based on present or economic costs
• Present Economy occurs in the following situations;
a. Selection of Materials
b. Selection of Method
c. Selection of Design
d. Site Selection
e. Comparison of Proficiency of Workers
f. Economy of Tool and Equipment Maintenance
g. Economy in the Utilization of Personnel
a. Selection of Materials
A machine part to be machined may be made either from an alloy of aluminum or
steel. There is an order for 8,000 units. Steel costs ₱3.80 per kg, while aluminium costs
₱8.70 per kg. If steel is used, the steel per unit weighs 110 grams; for aluminium, 30 grams.
When steel is used, 50 units can be produced per hour; for aluminium, 80 units per hour with
the aid of a tool costing ₱640, which will be useless after the 8,000 units are finished. The
cost of the machine and operator is ₱10.80 per hour. If all other costs are identical,
determine which material will be more economical.

Solution:
Steel Aluminum
Material Cost 110 30
₱3.80 = ₱𝟎. 𝟒𝟏𝟖 ₱8.70 = ₱𝟎. 𝟐𝟔𝟏
1,000 1,000
Labor and Machine ₱10.80 ₱10.80
= ₱𝟎. 𝟐𝟏𝟔 = ₱𝟎. 𝟏𝟑𝟓
50 80
Tool ------ ₱640
= ₱𝟎. 𝟎𝟖𝟎
8,000
Cost per piece = ₱0.634 = ₱0.476
Cost of 8,000 units = ₱5,072 = ₱3,808
b. Selection of Method
The ore of a gold mine in the Mountain Province contains, on the average,
0.5 gram of gold per ton. One method of processing costs ₱ 1,650 per ton and
recovers 93% of the gold, while another method costs only ₱ 1,500 per ton and
recovers 81% of the gold. If gold can be sold at ₱ 8,500 per gram, which method is
better and by how much?
Solution:
First Method:

Income= 0.93(0.5)(₱8,500) = ₱3,952.50

-- Cost = ₱1,650.00

₱2,302.50
Second Method:

Income= 0.81(0.5)(₱8,500) = ₱3,442.50

-- Cost = ₱1,500.00

₱1,942.50
c. Selection of Design
A company manufactures 1,000,000 units of a product yearly. A new
design of the product will reduce materials cost by 12%, but will increase
processing cost by 2%. If materials cost is ₱1.20 per unit and processing
will cost ₱0.40 per unit, how much can the company afford to pay for the
preparation of he new design and making changes in equipment?

Solution:
Decrease in material cost = 1,000,000 (0.12)(₱1.20) = ₱144,000
--- Increase in processing cost = 1,000,000 (0.02) (₱0.40) = ₱8,000
Net savings on new design ₱136,000
d. Site Selection
A certain masonry dam requires 200,000 cu.m. of gravel for its
construction. The contractor found two possible sources for the gravel with
the following data:

Source A Source B
Average distance,gravel pit to 3.0 km 1.2 km
Solution:
dam site
Gravel Cost/cu.m. at pit ------ ₱10.00
Cost of 200,000 cu.m. of gravel, Source A:
Purchase price of pit ₱800,000 ------
Road construction necessary ₱450,000 None Purchase price of gravel pit = ₱800,000
road construction = ₱450,000
Overburden to be removed at ------ 90,000 cu.m. Hauling = 200,000(3 km) (₱4.00) = ₱2,400,000
₱4.20/cu.m.
Total Cost = ₱3,650,000
Hauling cost per cu.m. per km ₱4.00 ₱4.00
Cost of 200,000 cu.m., Source B:

Cost of gravel at pit = 200,000(₱10.00) = ₱2,000,000


Removal of overburden = 90,000 (₱4.20) = ₱ 378,000
Hauling = 200,000 (1.2km) (₱4.00) = ₱ 960,000
Total Cost = ₱3,338,000
e. Worker Proficiency
Two workers, A and B, produce the same product the same product on
identical machines. A receives ₱25.00 per hour and he produces 100 units per
hour. B is able to produce 120 units per hour. The machine rate or cost of
operation of the machine used by them is ₱100.00 per hour.
(a) Determine the cost per piece for worker A.
(b) Determine the hourly wage of worker B in order that his cost per piece will equal
that of A.

Solution:
₱𝟐𝟓.𝟎𝟎+₱𝟏𝟎𝟎.𝟎𝟎
(a) Cost per piece for worker A = = ₱𝟏. 𝟐𝟓
𝟏𝟎𝟎
(b) Let W= wage of worker B per hour so that his cost per piece is equal to that of A.
𝑾=₱𝟏𝟎𝟎.𝟎𝟎
Then, = ₱1.25
𝟏𝟐𝟎
W = ₱50.00
f. Economy of Tool and Equipment Maintenance
g. Utilization of Personnel
A man decided to paint his house himself after office hours. He
can paint 25 sq.m. per hour on the average. It takes him 15 minutes to
prepare his materials and 20 minutes to keep the materials after
painting. If there are 900 sq.m. to be painted, how long will it take him
to paint his house if he devotes 2 ½ hours each day?

Solution:
900
Number of hours required = = 36 hours
25
15+20
Net time daily devoted to actual painting = 2.5 - = 1.92 hours
60
36
Number of days = = 18.8 or 19 days
1.92

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