ENGINEERING

ECONOMY
(ES40)

INTRODUCTION TO
ENGINEERING ECONOMY
ENGINEER means:
Problem solver
Find new ways doing things economically
Engineering is the art of doing that well with one dollar which
any bungler can do with two (Arthur M. Wellington, 1887)
The Challenge:
Every problem has multiple solutions but how to choose the
best one.

Engineers not only model the stress on the

columns, they must also model the
economic impact of their recommendations .

INTRODUCTION TO
ENGINEERING ECONOMY
What is Engineering Economy?
Engineering project must not only be physically
realizable but also economically affordable
Engineering Economy involves the systematic
evaluation of the economic merits of proposed
solutions to engineering problems

Engineering is more than a

problem solving activity

THE PRINCIPLES OF
ENGINEERING ECONOMY
SEVEN PRINCIPLES OF ENGINEERING ECONOMY:

1. Develop the alternatives - the choice (decision) is

among alternatives. The alternative need to be
identified and then defined for subsequent analysis.
2. Focus on the differences only the differences in
expected future outcomes among the alternatives are
relevant to their comparison and should be
considered in the decision.
3. Use a consistent viewpoint the prospective
outcomes of the alternatives, economic and other,
should be consistently developed from a defined
viewpoint (perspective)

THE PRINCIPLES OF
ENGINEERING ECONOMY
4. Use a common unit of measure using a
common unit of measurement to enumerate as many
of the prospective outcomes as possible will make
easier the analysis and comparison of the alternatives.

5. Consider all relevant criteria selection of a

preferred alternative (decision making) requires the
use of a criterion. The decision process should
consider the outcomes enumerated in the monetary
unit and those expressed in some other unit of
measurement or made explicit in a descriptive manner.

THE PRINCIPLES OF
ENGINEERING ECONOMY
6. Make uncertainty explicit uncertainty is inherent
in projecting (or estimating) the future outcomes of
the alternatives and should be recognized in their
analysis and comparison.
7. Revisit your decisions improved decision making
results from adaptive process; to the extent
practicable, initial projected outcomes of the selected
alternative and actual results achieved should be
subsequently compared.

ENGINEERING ECONOMY
AND THE DESIGN PROCESS
ENGINEERING ECONOMIC PROCESS ANALYSIS PROCEDURE

Problem recognition, definition, and evaluation.

Problems must be well understood and stated in an explicit form
before the project team proceeds with the rest of the analysis

Development of the feasible alternatives.

Searching for potential alternatives (creativity and
resourcefulness), screening them to select a smaller group of
feasible alternatives for detailed analysis.

Development of the outcomes and cash flows for

alternative.
Cash flow approach (revenue and payments), nonmonetary
factors e.g. meeting or exceeding customer expectations,
safety to employees, employee satisfaction, etc.

ENGINEERING ECONOMY
AND THE DESIGN PROCESS
ENGINEERING ECONOMIC PROCESS ANALYSIS
PROCEDURE

Selection of a criterion.
Long term interest of the client and organisation, environmental
concerns, etc.

Analysis and comparison of the alternatives.

Based

on cash flows, exchange rate, inflation, regulatory, etc.

Selection of the preferred alternatives.

result of the total effort of the above mentioned 5 steps. It is the

technical-economic modelling.

Performance monitoring and post monitoring results.

Accomplished during and
after the time that the result achieved. The aim of post evaluation is
to learn how to do better the job.

COST CONCEPTS FOR

DECISION MAKING
Fixed, variable, and mixed costs. A fixed cost, such as
rent, does not change in lock step with the level of activity.
By-product costs. A product may be an incidental byproduct of a production process (such as sawdust at a
lumber mill).
Allocated costs. Overhead costs are allocated to
manufactured goods only because it is required by the
accounting standards (for the production of financial
statements).

COST CONCEPTS FOR

DECISION MAKING
Discretionary costs. Only a few costs can actually be
dropped without causing any short-term harm to an
organization. Ex. Employee training and maintenance
Step costs. Though some costs are essentially fixed, it
may be necessary to make a large investment in them
when the activity level increases past a certain point. Ex.
adding a production shift

PRESENT ECONOMY STUDIES

PRESENT ECONOMY STUDIES (PES) - engineering
economic analyses where alternatives for accomplishing a
specific task are being compared over one year or less and
the influence of time on money can be ignored.
2 RULES/CRITERIA TO BE FOLLOWED:
1. When revenues and other economic benefits are present
and vary among alternatives, choose the alternative that
maximizes overall profitability based on the number of
defect-free units of a product or service produced

PRESENT ECONOMY STUDIES

2. When revenues and other economic benefits are NOT
present or are constant among all alternatives, consider only
the costs and select the alternative that minimizes total cost
per defect-free unit of product or service output.
SITUATIONS WHERE PES ARE INVOLVED:
1. MATERIAL SELECTION involves selection among
materials available that will result in the most economical
product and give the best results.
2. SELECTION OF METHODS two or more different
methods may give the same satisfactory results but select
the most economical way to accomplish operations

PRESENT ECONOMY STUDIES

3. SELECTION OF DESIGN the design to be selected must
be best suited for the work to be done with particular care
being given to the one which will do the work with the
utmost economy.
4. SITE SELECTION costs relevant to selecting sites must
be carefully considered (land cost, construction cost, cost of
available labor, cost of transporting equipment and
materials)
5. PROFICIENCY OF WORKERS workers have varying
efficiency and proficiency; worker proficiency can be
translated into monetary values

PRESENT ECONOMY STUDIES

6. ECONOMY OF TOOL AND EQUIPMENT MAINTENANCE
consider the costs of acquiring tools and equipment and the
costs of maintaining them
7. ECONOMY IN THE UTILIZATION OF PERSONNEL only a
certain number of personnel will lead to the highest
productivity; increasing this number will not cause a
proportional increase in productivity

PROBLEM 1
MATERIAL SELECTION
Either tool steel or carbon steel can be used for the set of tool
on a certain lathe. It is necessary to sharpen the tools
periodically. Relevant information for each is shown below.
Carbon steel

Tool Steel

Output at optimum speed

100 pcs/hr 130 pcs/hr
Time
between tool grinds 3 hours 6 hours
Time required to change
tools
1 hour 1 hour
Cost of unsharpened tools
$400
$1200
Number of time tools can be ground
10
5
The cost of the lathe operator is $14 per hour, incl. the tool changing
time during which he is idle. The tool changer costs $20 per hour for
just the time he is changing tools. Variable overhead costs for the lathe
are $28 per hour, including tool-changing time. Which type of steel
should be used to minimize overall cost per piece?