MIE 754 Manufacturing

1
MIE 754 - Class 2 Manufacturing Engineering
Economics

• Concerns and Questions
• Quick Recap of Previous Class
• Todays Focus
• Chap 1 - Cost Terminology
• Chap 2 - Computations Involving Interest
• Hmwk 1 Due Today - Mini Biosketch
• Hmwk 2 Due in 1 Week
• Chap 1 - Probs 1, 6, 11, 12, 13

2
Concerns and Questions

• Solutions to homework problems will be posted on
  the web
• Textbook corrections on the course web page under
  Textbook and More

3
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.

4
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?

5
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

6
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.

7
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? Im a retired
  person living with my son, and I have rented my
  former home, valued at about 185,000, for 400
  per month.

8
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?

9
Firm and Nonmonetary Factors

• minimization of risk of loss
• maximization of safety
• maximization of sales
• maximization of service quality
• maximization of well-being of employees
• creation or maintenance of a desired public image

10
Chapter 2 Computations Involving Interest

• Time value of money
• a fundamental concept
• Examples

11
The Concept of Equivalence

• Equivalence Indifference
• Choosing an Interest Rate
• (discount rate, opportunity cost)
• Based on
• Need
• Risk
• Alternative investment opportunities
• Inflation

12
Interest Calculations

• Fn P In
• Simple Interest - interest per period is based on
  the principal amount only
• Compound Interest - interest per period is based
  on the remaining principal amount plus any
  accumulated interest

13
Simple Interest

• i P interest each time period
• Fn P iPn or P(1 in)
• For Example

14
Compound Interest

• i Fn-1 interest for current period
• Fn Fn-1(1i) or Fn P(1 i)n
• For Example

15
Compare Simple and Compound Interest

• Suppose you deposit 1000 in a savings account
  earning 6 annually. How much will be in the
  account after 3 years?
• P? F? n? I?
• Show for Simple and Compound

16
Cash Flow Diagrams

• F occurs n periods after P
• What if you know F and want to find P?
• FP(1i)n P?

17
Example of moving money through time

• Suppose I6, F1191.00, and n3
• How much is this equivalent to now?
• Additional examples