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    IE 411 Lecture6 90AB

    Uploaded by

    Zain Ul Abidin
    This document discusses concepts related to engineering economics including cost concepts, design economics, and breakeven point relationships. It provides examples of problems and solutions related to determining maximum revenue, maximum profit, breakeven points, and optimal demand and pricing for different products. The key data needed to determine maximum profit includes fixed and variable costs in addition to the demand and pricing relationships. The document concludes with an assignment problem analyzing factors for a decision on whether to drive farther for cheaper gasoline.

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    © All Rights Reserved
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    IE 411 Lecture6 90AB

    Uploaded by

    Zain Ul Abidin
    43 views15 pages
    This document discusses concepts related to engineering economics including cost concepts, design economics, and breakeven point relationships. It provides examples of problems and solutions related to determining maximum revenue, maximum profit, breakeven points, and optimal demand and pricing for different products. The key data needed to determine maximum profit includes fixed and variable costs in addition to the demand and pricing relationships. The document concludes with an assignment problem analyzing factors for a decision on whether to drive farther for cheaper gasoline.

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    This document discusses concepts related to engineering economics including cost concepts, design economics, and breakeven point relationships. It provides examples of problems and solutions related to determining maximum revenue, maximum profit, breakeven points, and optimal demand and pricing for different products. The key data needed to determine maximum profit includes fixed and variable costs in addition to the demand and pricing relationships. The document concludes with an assignment problem analyzing factors for a decision on whether to drive farther for cheaper gasoline.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    43 views15 pages

    IE 411 Lecture6 90AB

    Uploaded by

    Zain Ul Abidin
    This document discusses concepts related to engineering economics including cost concepts, design economics, and breakeven point relationships. It provides examples of problems and solutions related to determining maximum revenue, maximum profit, breakeven points, and optimal demand and pricing for different products. The key data needed to determine maximum profit includes fixed and variable costs in addition to the demand and pricing relationships. The document concludes with an assignment problem analyzing factors for a decision on whether to drive farther for cheaper gasoline.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    Cost Concepts and Design Economics 1

    IE-411
    Engineering Economy

    Breakeven Point Relationships


    Industrial Engineering Department
    Objectives

    • Problem Solution
    • Assignment

    Cost Concepts and Design Economics 3


    Problem 1

    A lash adjuster keeps pressure constant on


    engine valves, thereby increasing fuel efficiency
    in automobile engines. The relationship between
    price (p) and monthly demand (D) for lash
    adjusters made by the Wicks Company is given
    by this equation: D = (2,000 − p)/0.10. What is
    the demand () when total revenue is maximized?
    What important data are needed if maximum
    profit is desired?

    Cost Concepts and Design Economics 4


    Solution

    (a) D = (2,000 − p)/0.10


    p = 2000 - 0.10 D
    Total Revenue = p . D
    TR = (2000 – 0.10 D) D
    TR = 2000D – 0.10 D2
    For maximum revenue,

    Cost Concepts and Design Economics 5


    Solution

    2000 – 2(0.10) D = 0
    2000 - 0.20 D = 0
    = 10000 units per month

    To determine maximum profit, we need fixed and


    variable cost in addition to the given data

    Cost Concepts and Design Economics 6


    Problem 2

    A large company in the communication and


    publishing industry has quantified the
    relationship between the price of one of its
    products and the demand for this product as
    Price = 150 − 0.01 × Demand for an annual
    printing of this particular product. The fixed costs
    per year = $50,000 and the variable cost per
    unit=$40. What is the maximum profit that can
    be achieved if the maximum expected demand
    is 6,000 units per year? What is the unit price at
    this point of optimal demand?

    Cost Concepts and Design Economics 7


    Solution

    (a) p = 150 – 0.01 D


    Cf = $ 50000
    cv = $ 40 / unit
    a = 150, b = 0.01
    Condition 1: a - cv = 150 – 40 $110 > 0
    D* =
    D* =
    D* = 5500 units / year

    Cost Concepts and Design Economics 8


    Solution

    Condition 2 :
    Profit = Total Revenue – Total Cost
    Profit = p . D – (Cf + cv . D)
    Profit = (150 – 0.01 D) D – 50000 – (40) D
    Profit = 5500 (150 – 0.01 (5500)) – 50000 – 40(5500)
    Profit = $ 252500

    (b) p = 150 - 0.01(5500)


    p = $95 / unit

    Cost Concepts and Design Economics 9


    Alternative Solution

    Profit (P) = Total Revenue – Total Cost


    P = p . D – (Cf + cv . D)
    P = (150 – 0.01 D) D – (5000 + 40 D)
    P = 150D – 0.01D2 – 5000 - 40D
    P = 110D - 0.01D2 – 5000
    dP/dD = 110 – 0.02D = 0
    110 = 0.02 D
    D* = 5500 units / year

    Cost Concepts and Design Economics 10


    Problem 3

    The annual fixed costs for a plant are $100,000,


    and the variable costs are $140,000 at 70%
    utilization of available capacity, with net sales of
    $280,000. What is the breakeven point in units
    of production if the selling price per unit is $40?

    Cost Concepts and Design Economics 11


    Solution

    CF = $100000/year, CV = $140000/year
    Sales = $280,000/year, p = $40/unit
    Annual Sales (units) = $280,000/$40
    = 7,000 units/year
    Cv = cv . D
    cv = $140,000/7,000 = $20/unit
    D′ =
    D′ =
    D′ = 5000 units /year

    Cost Concepts and Design Economics 12


    Assignment
    Stan needs 15 gallons of gasoline to top off his automobile’s gas tank. If he
    drives an extra eight miles (round trip) to a gas station on the outskirts of
    town, Stan can save $0.10 per gallon on the price of gasoline. Suppose
    gasoline costs $3.90 per gallon and Stan’s car gets 25 mpg for in-town
    driving. Judge that should Stan make the trip to get less expensive
    gasoline? Each mile that Stan drives creates one pound of carbon dioxide.
    Each pound of CO2 has a cost impact of $0.02 on the environment.
    Determine other factors (cost and otherwise) should Stan consider in his
    decision making?

    Cost Concepts and Design Economics 13


    Assignment

    A large wood products company is negotiating a


    contract to sell plywood overseas. The fixed cost that
    can be allocated to the production of plywood is
    $800,000 per month. The variable cost per thousand
    board feet is $155.50. The price charged will be
    determined by p = $600 − (0.05)D per 1,000 board
    feet.
    a. For this situation, determine the optimal monthly
    sales volume for this product and calculate the profit
    (or loss) at the optimal volume.
    b. Compute the domain of profitable demand
    during a month?

    Cost Concepts and Design Economics 14


    Thank You

    Cost Concepts and Design Economics 15

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