MM 314 Engineering Economy

COST (Period Expenses-Cost per unit) BREAK EVEN ANALYSIS PRESENT ECONOMY ANALYSIS

MM 314 ENGINEERING ECONOMY DR. MUSTAFA YURDAKUL

Various types of manufacturing costs incurred by a manufacturer

When a manufacturer produces a SINGLE product type, HOW DO YOU CALCULATE COST PER UNIT?

When a manufacturer produces MULTIPLE product types, HOW DO YOU CALCULATE COST PER UNIT? THE KEY QUESTION: HOW DO YOU DISTRIBUTE INDIRECT (OVERHEAD) COSTS TO DIFFERENT PRODUCT TYPES? ------ VOLUME BASED COSTING ------ ACTIVITY BASED COSTING (ABC)

BREAK-EVEN CHART ANALYSIS

-AT LEAST HOW MANY DO WE HAVE TO PRODUCE TO PAY OUR
ANNUAL VARIABLE COSTS AND RECOVER OUR FIXED COSTS?

The general price-demand relationship

The demand for a product or service is directly related to its price according to p=abD where p is price, D is demand, and a and b are constants that depend on the particular product or service.

Total revenue depends on price and demand.

Total revenue is the product of the selling price per unit, p, and the number of units sold, D.

Calculus can help determine the demand that maximizes revenue.

Solving, the optimal demand is

We can also find maximum profit

Profit is revenue minus cost, so
for Differentiating, we can find the value of D that maximizes profit.

And we can find revenue/cost breakeven.

Breakeven is found when total revenue = total cost. Solving, we find the demand at which this occurs.

EXAMPLE

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TOTAL COST AND COST PER UNIT

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COSTS FOR OPERATING A CAR AND CALCULATION COST PER MILE

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Costvolume relationships pertaining to annual automobile costs

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Average cost per mile of owning and operating a car

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PRESENT ECONOMY EXAMPLES

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