Transcript MIE 754 Manufacturing & Engineering Economics

MIE 754 - Class #1
Manufacturing & Engineering
Economics
Professor:
Office:
Office Hrs:
E-mail:
Phone:
Dr. Janis Terpenny
120 E Marston Hall
10am-12 noon Tues & Thurs
[email protected]
(413) 545-0707 (office)
(413) 256-6052 (home)
Course Description
 This
course examines the monetary and
non-monetary considerations necessary
in strategic decision making
 Engineering economic principles
developed and applied throughout lifecycle phases
• design and development, production,
construction, utilization, support, phase out
and disposal
• consideration of risk and uncertainty
Course Description
 Textbook:
• Canada, John R., Sullivan, William, G., and
White, John A. Capital Investment Analysis
for Engineering and Management, Second
Edition, Prentice Hall, Inc., 1996,
(ISBN 0-13-311036-2)
• Additional handouts distributed as needed
 Prerequisites
• None
• Undergraduate course in engineering
economics would be helpful
Topics Covered
 Introduction
and Overview
 Review of Engineering Economy Basics
 The Economics of Engineering Design
 Cost Estimating and Management
 Replacement Analysis
 Dealing with Risk and/or Poor Estimates
 Decision Analysis for Complex and
Multiple Attributes Problems
 Revenue Expansion vs Cost Reduction
Grading
Exam1
 Final Exam1
 Assignments
 Mid-term
20%
20%
30%
• Graded Assignments 20%
• Homework check 10%
 Term
1
Project
Exams are take home
30%
GROUND RULES
 There
are no dumb questions
 We criticize ideas, not people
 Let's all be considerate of one another
•
•
•
•
It is OK to tell the instructor we're out of time
If you need to leave class, do so quietly
Please don't talk while others are talking
Be patient and kind to one another …
especially to the instructor
Course Web Site:
http://mielsvr2.ecs.umass.edu/virtual_econ/
Homework #1:
Mini Biography … Who are you?
 Current
Position
 Degree Pursuing
 Career Objectives
 Outside Interests
 Why are you taking MIE 754?
 Due
1 week from today
• Send via e-mail attachment (preferred), or
• Submit hardcopy (in-class or through VIP)
Engineering Economy is Problem
Solving
 Engineering
is a profession devoted to
problem solving and design of
alternative courses of action.
 Engineering economy is a subset of
engineering devoted to deciding which
course of action best meets technical
performance criteria while using capital
in a prudent manner.
Engineering Economy is Problem
Solving
 A problem
is a perception of a gap
between the present and some desired
state of affairs.
 Three conditions characterize a
problem:
• Alternative courses of action are available,
• The alternative selected has a significant
effect on the future, and
• The best alternative to select is not
apparent.
Problem Examples ?
From:
 Industry
 Government
 Personal
Engineering economics is more than
evaluating investment problems ...
Most engineers end up designing
systems, equipment, processes, etc., it
is imperative that we ask “will it pay” in
the context of design? Why?
Approximately 80-85% of a product's
life cycle cost is determined during
preliminary and detailed design
activities. Think about it! Engineers
make multi-million dollar decisions
every minute … perhaps without
realizing it.
Engineering Economics
Analysis Procedure
 Problem
recognition, formulation, and
evaluation
 Development of feasible alternatives
 Development of the net cash flow for
each alternative
 Selection of a criterion (or criteria)
 Analysis and comparison of the
alternatives
 Selection of the preferred alternative
 Performance monitoring and post
evaluation of results
Basic Principles of Economic Analysis
 Develop
the Alternatives
 Focus on the Differences
 Use a Consistent Viewpoint
 Use a Common Unit of Measure
 Consider all Relevant Criteria
 Make Uncertainty Explicit
 Revisit Your Decisions
Recognition of a Problem Opportunity

1st step of rational decision making

Obvious problem opportunities
Examples?

Non-obvious problem opportunities
Examples?
Generation of Alternatives
 Use
Imagination and Creativity
 State
Problem and Objectives Clearly
 Identify
Classes of Alternatives
 Identify
Variations for Each Class
Estimates in Economic Analysis

Alternatives are based on estimates
about the future

Poor estimates lead to poor analysis

Sources of data for estimates:
accounting records, statistical,
economic, engineering data, good
judgment
Speaking a Common Language …
Cost Terminology
Fixed/Variable Costs - If costs change
appreciably with fluctuations in business
activity, they are “variable.” Otherwise, they
are “fixed.” A widely used cost model is:
Total Costs = Fixed Costs + Variable Costs
Recurring/Nonrecurring Costs - If costs are
repetitive and occur when an organization
produces goods or services on a continuing
basis, they are “recurring.” Otherwise they
are “nonrecurring.”
Cost Terminology
Direct/Indirect Costs - If costs can be
reasonably measured and allocated to a
specific output, they are “direct.”
Otherwise they are “indirect.” Examples?
Overhead Costs - All costs of providing goods
or services other than direct labor and direct
material. Indirect costs are a subset of
overhead costs. Fixed overhead relates
more to plant capacity than production
volume (variable overhead). Examples?
Cost Terminology
 Allocation
of overhead to specific outputs
may be in proportion to:
1. Direct labor hours
2. Direct material costs
3. Machine hours
 Total
Cost = Direct Material +
Direct Labor + Overhead
Cost Terminology
Sunk Costs - Past costs that are unrecoverable and
are not relevant for decision making purposes.
Suppose the heating, ventilating and air conditioning
system in your home has just experienced a major
failure. You immediately call the Breath Easy
Company for an estimate to replace your system. Their
price is $4,200 and you gladly sign a contract and write
a check for the required $1,000 down payment. At this
point the weather warms and the urgency for
replacement of your defunct system eases somewhat.
You then get a second estimate for a new HVAC
system. It is $3,000. You call Breath Easy back and
they inform you that the $1,000 down payment is not
refundable! What should you do? Explain.
Cost Terminology
Opportunity Costs - The cost of forgoing the
chance to earn interest (or profit) on
investment funds.
Question: Is it in my best interest to keep my
home because it is all paid for? I’m a
retired person living with my son, and I
have rented my former home, valued at
about $185,000, for $400 per month.”
Cost Terminology
There is little reason to continue owning your
former home as a rental. To see this,
consider the opportunity cost, i.e., the return
you are giving up, of ownership. The same
$185,000 invested in secure U.S. Treasury
bonds at 7% will provide almost $13,000 in
yearly income. This is many times what is
obtained from continual rental.
Your Thoughts?