Engineering Economy
Chapter 2: Fundamental Cost
Concepts (Part 2)
Page 42 Sullivan Books
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Variable Incremental
Fixed costs Cash costs Book costs
costs costs
Indirect Standard Opportunity
Direct costs Sunk costs
costs costs costs
Lifecycle Investment Working O&M Disposal
costs costs capital Costs Costs
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.1.6 Life-cycle cost
• The summation of all costs related to a product, structure,
system, or service during its life span.
Project Detailed design,
initiation construction Operation Retirement
Conceptual
planning, Construction and
and design and disposal
resource maintenance
assessment acquisition
ACQUISITION PHASE OPERATION PHASE
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.1.6 Life-cycle cost (Con’t)
Importance of engineering economy
analysis in operational phase
To achieve Determine whether Projecting the
efficient and (and when) timing of
effective support replacements of retirement and
to operations assets should occur disposal activities
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.1.6 Life-cycle cost (Con’t)
Investment cost
Terminology in
life-cycle costs
Working capital
Operation & maintenance cost
Disposal cost
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.1.6 Life-cycle cost (Con’t)
I N V E S T M E N T C O S T S
-capital investment required for most activities in the
acquisition phase.
W O R K I N G C A P I T A L
-funds required for current assets (equipment, facilities etc)
that need to set up and support of operational activities.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.1.6 Life-cycle cost (Con’t)
OPERATION & MAINTENANCE COST
-expense items in operation phase. The direct and indirect
costs of operation associated with 5 resources area (people,
machines, materials, energy and information)
D I S P O S A L C O S T
-nonrecurring cost of shutting down or handover the
operation at the end of life cycle. These costs will be
offset in some instances by receipts from the sale of
assets with remaining market value.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.2 Price and demand
p General Price-Demand
Relationship
p = a - bD
Price
• Where b explained the rate of price D
reduction for each unit increase in Units of Demand
demand
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.3 Total revenue
• Revenue is the amount of money that a company actually receives
including discounts.
• Also known as gross income or sales.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.3 Break-even point
Break-even point can be explained in the following situation:
• When the company earns enough revenue to cover the total cost
• Amount of sales required to cover the total cost
• Where the point that the company start to gain profit
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
2.3 Break-even point (Con’t)
TR
Cost and Revenue (RM)
Profit TC
Break-even Point
FC
Loss
Fixed costs
0 D’ D
Volume (Demand)
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
• Fixed cost: unaffected by changes in activity level.
• Variable cost: vary in total with the quantity of output (or
similar measure of activity)
• Incremental cost: additional cost resulting from increasing
output of a system by one (or more) units
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
TR
Cost and Revenue (RM) Profit TC
Total revenue = Total cost
Break-even Point
FC
Loss
Fixed costs
0 D’ Volume (Demand) D
Min volume where start making profit
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright ©2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
