MODULE 1

THE FOUNDATIONS OF ENGINEERING ECONOMY

Unit 1
INTRODUCTION TO ENGINEERING ECONOMY
UNIT LEARNING OUTCOMES

 TLO 1.1: Understand the basic concepts and principles of engineering economy.

Introduction

The Accreditation Board for Engineering and Technology states that

engineering “is the profession in which knowledge of the mathematical and natural sciences
gained by study, experience, and practice is applied with judgement to develop ways to
utilize, economically, the materials and forces of nature for the benefit of mankind.” In this
definition, the economic aspects of engineering are emphasized, as well as the physical
aspects. Clearly, it is essential that the economic part of engineering practice be
accomplished well. Thus, engineers use knowledge to find ways of doing things
economically. (Eshenbach,2011)

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 Definition of Engineering Economy

 Is the analysis and evaluation of the factors that will affect the economic
success of engineering projects to the end that a recommendation can be
made which will ensure the best use of capital (Sta. Maria, 2000)

 Engineering Economy adjust for the time value of money to balance current
and future revenue and costs. (Eschenbach, 2011)

 Beginning with the Module 2, interest will be defined and used, but for now, we
need to recognize that having 100 pesos today has more value than having
100 pesos in a year. If you doubt that money has time value, why are you not
eager to loan someone P1,000 now to be repaid P1,000 at the end of the year?

Principles of Engineering Economy

 The foundation of engineering economy is defined to be a set of principles that

provide a comprehensive doctrine for developing the methodology.

 Once a problem or need has been clearly defined, the foundation of the
discipline can be discussed in terms of seven principles.

Principle 1: Develop the alternatives

Carefully define the problem! Then the choices is among alternatives.
Principle 2 Focusneed
The alternative on the
todifferences
be identified and then defined f analysis.

Principle 2: Focus on the differences

Only the differences in expected future outcomes, among the
alternatives relevant to their comparison and should be considered in
the decision.

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 Principle 3: Use a consistent Viewpoint
The prospective outcomes of the alternatives, economic and others,
Principle 2 Focus on the differences
should be consistently developed from a defined view point.

Principle 4 Use a common unit of measure

Using a common unit of measurement to enumerate as many of the
prospective outcomes as possible will simplify the analysis of the
alternatives.

Principle 5 Consider all relevant criteria

Selection of a preferred alternative requires the use of a criterion or
several criteria. The decision process should consider both the
outcomes enumerated in the monetary unit and other unit of
measurement or made explicit in a descriptive manner.

Principle 6 Make Risk and Uncertainty Explicit

Risk and uncertainty are inherent in estimating the future outcomes of
the alternatives and should be recognized in their analysis and
comparison.

Principle 7 Revisit your Decisions

The initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved.

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 Engineering Economy and the Design Process

 An engineering economy study is accomplished by using a structured

procedure and mathematical modelling techniques.
 The economic results are then used in a decision situation that normally
includes other engineering knowledge and input.

Decision-making Flowchart

Illustrative example of applying the 7 steps of the decision making process

(Eschenbach, 2011)

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 Charlene Selects a Pump
Charlene is a newly hired chemical engineer. She has been asked to select a
pump to move 15,000 liters of slurry a day to the pollution treatment center.
What process should she use to select the pump?

Solution:

1. Define Problem: Key problem characteristics include but not limited to

(1) slurry characteristics, such as particle and corrosiveness; (2) pipe
size and flow velocities for input and output; (3) any size, power, and
location restrictions; (4) time horizon for using the pump and how soon is
it needed; (5) cost limits; (6) vendor selection process-purchase order,
competitive bid and (7) how many pumps are needed.

2. Choose Objectives: Costs over the pump’s life and technical performance
will usually dominate, but Charlene must also consider other factors, such
as vendor and pump reliability, similarity to current practice,
maintainability, and flexibility for change.

3. Identify Alternatives: If the pump will be purchased from a catalog or

other vendor material, then Charlene must assemble and examine those
materials from all appropriate vendors.

4. Evaluate Consequences: Charlene must enumerate each alternative’s

advantages and disadvantages with respect to the objectives.

5. Select: Charlene must select a pump based on costs and benefits

adjusted for the time value of money. Technical performance objectives
must be completely satisfied, so that any pump with deficiencies is
eliminated from consideration.

6. Implement. The pump must be ordered and installed.

7. Audit. This step evaluate the pump and the decision-making process
after the pump is in use. The intent is to provide “lessons learned” to
assist future decision.

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  It is also useful to focus on how to do each step correctly

1. Define Problem: The key skill in problem definition is asking questions and
correctly pulling together information from a variety of sources.

2. Choose Objective(s): the most common error is considering only the costs
to purchase or build. The correct objective considers the time value of
money and all costs and benefits. These include purchase, installation,
overhaul, operation, and disposal costs, and the benefits that occur over
the projects life.

3. Identify Alternatives: The best alternative may be overlooked if the problem

is defined too narrowly. Or the problem might be defined properly, but
creativity is missing. As many alternatives as possible should be suggested.
One way of generating ideas and enhancing creativity is through
brainstorming, in which a group generates as many ideas as possible.

4. Evaluate Consequence: A common mistake when evaluating alternatives

is short sighted focus on which consequence to include. At first,
consequences may be evaluated in a cursory way, because this may be
enough to eliminate obviously inferior alternatives. The consequences for
the better alternatives maybe evaluated in more detail.

5. Select: Selecting the best alternative and choosing the correct objective is
are closely linked. The selection criteria should be based on identified
objective.

6. Implement: The selection process may determine the success or failure of

implementation. The key here is the involvement of stakeholders (the
people affected by thee process: employees, customer, users, managers,
owners, and stockholders).

7. Audit: This step is often omitted. The pressure to move on and complete
the next project is substantial. An audit trail can be helpful later. Record
the source of each data item. Remember that the reward for auditing is
learning.

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 Ethics and Decision Making

 Business and personal decision making is guided by ethics.

 This includes establishing systems of belief and moral obligations, defining

values and fairness, and determining duty and guidelines for conduct.

 Ethics are so important that professional engineering societies, organizations,

and every individual possess ethical codes or standards of conduct.

 Example: the Code of Ethics of the National Society of Professional Engineers

has as its fundamental canon:

Engineers, in the fulfilment of their professional duties, shall:

 Hold Paramount the health, safety, and welfare of the public.

 Perform services only in areas of their competence.

 Issue public statements only in an objective and truthful manner.

 Act for each employer or client as faithful agents or trustees

 Avoid deceptive acts.

 Conduct themselves honorably, responsibly, ethically, and lawfully so as to

enhance the honor, reputation, and usefulness of the profession.

 There are ethical issues that can arise at every step of the decision making
process described in the table below.

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 Self Assessment 1 Application of the Engineering Economic Analysis Procedure.
Please answer this problems and submit to google classroom under classwork: Assessment
M1.1

Your friend is considering investing in a two-year MBA program. Tuition costs will
be $60,000 for two years while living expenses will be $25,000 per year. She has
$10,000 in savings, which she can spend on her education, and will need to borrow
the rest from her bank. Her annual loan repayment will be $10,500. She currently
works as an analyst and makes $60,000 a year; after she gets her degree she hopes
to work as a manager for $150,000 a year.

Refer to the seven-step procedure to answer these questions:

(a) How should your friend formulate her problem?

(b) What are her projected costs? (Identify all costs)

(c) Suggest alternatives to your friend to reduce the uncertainty associated

with finding a high-income job to pay off her loan

(d) Select a criterion for discriminating among alternatives, and use it to

advise your friend on which course of action to pursue.

(e) Attempt to analyze and compare the alternatives in view of at least one
criterion in addition to cost.

(f) What should your friend do based on the information you and she have
generated?

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 Problems Solving M1.1: Answer the following problems in word
document and submit in the Google classroom under classwork Problem Solving M1.

Problem 1. During your first month as an employee at Greenfield Industries (a large drill-
bit manufacturer), you are asked to evaluate alternatives for producing a newly designed
drill bit on a turning machine. Your boss’ memorandum to you has practically no information
about what the alternatives are and what criteria should be used. The same task was posed
to a previous employee who could not finish the analysis, but she has given you the following
information: An old turning machine valued at $350,000 exists (in the warehouse) that can
be modified for the new drill bit. The in-house technicians have given an estimate of
$40,000 to modify this machine, and they assure you that they will have the machine ready
before the projected start date (although they have never done any modifications of this
type). It is hoped that the old turning machine will be able to meet production requirements
at full capacity. An outside company, McDonald Inc., made the machine seven years ago and
can easily do the same modifications for $60,000. The cooling system used for this machine
is not environmentally safe and would require some disposal costs. McDonald Inc. has
offered to build a new turning machine with more environmental safeguards and higher
capacity for a price of $450,000. McDonald Inc. has promised this machine before the start
up date and is willing to pay any late costs. Your company has $100,000 set aside for the
start-up of the new product line of drill bits. For this situation,

a. Define the problem.

b. List key assumptions.

c. List alternatives facing Greenfield Industries.

d. Select a criterion for evaluation of alternatives.

e. Introduce risk into this situation.

f. Discuss how nonmonetary considerations may impact the selection.

g. Describe how a post audit could be performed.

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 Unit 2
COST CONCEPTS AND DESIGN ECONOMICS
UNIT LEARNING OUTCOMES

TLO 1.1: To analyse short-term alternatives when the time value of money is not
a factor. We accomplish this by understanding the following concepts 1) Cost
Terminology 2) the General Economic Environment 3) Accounting Fundamentals
4) Present Economy Studies.

“The correct solution to any problem depends primarily on a true understanding of

what the problem really is”
- Arthur M. Wellington (1887)

Diagnostic Quiz on Cost Classification: Please upload your answer in our

Google Classroom classwork
Classify each of the following cost items as mostly fixed or variable cost. Write F for fixed cost and V for
variable cost on the space provided on the left of the cost being classified.

____ Raw Material ______ Administrative Salaries

____ Direct Labor ______ Payroll Taxes

____ Depreciation ______ Insurance of building

____Supplies ______ Clerical salaries

____ Utilities ______ Sales commission

___ Property Tax ______ Rent

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 COSTS TERMINOLOGY (by Obaidullah Jan, ACA, CFA and last modified on Mar 26, 2019)

Costs are classified into fixed costs, variable costs or mixed costs (based on behavior);
product costs or period costs (for external reporting); direct costs or indirect costs (based on
traceability); and sunk costs, opportunity costs or incremental costs (for decision-making).

Classification of costs based on behavior helps in cost-volume-profit analysis. Classification

based on traceability is important for accurate costing of jobs and units produced.
Classification for the purpose of decision-making is important to help management identify
costs which are relevant for a decision.

Cost Classification Diagram

The following diagram summarizes the different categories into which costs are classified
for different purposes:

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 PRODUCT COSTS VS PERIOD COSTS

Product costs (also called inventoriable costs) are costs assigned to the
manufacture of products and recognized for financial reporting when sold.
They include direct materials, direct labor, factory wages, factory
depreciation, etc.

Period costs are on the other hand are all costs other than product costs.
They include marketing costs and administrative costs, etc.

 Breakup of Product Costs

The product costs are further classified into direct materials, direct labor
and manufacturing overhead costs:

Direct materials: Represents the cost of the materials that can be

identified directly with the product at reasonable cost. For example,
cost of paper in newspaper printing, etc.

 Direct labor: Represents the cost of the labor time spent on that
product, for example cost of the time spent by a petroleum engineer
on an oil rig, etc.
 Manufacturing overhead costs: Represents all production costs except
those for direct labor and direct materials, for example the cost of an
accountant's time in an organization, depreciation on equipment,
electricity, fuel, etc.

DIRECT COSTS VS INDIRECT COSTS

The product costs that can be specifically identified with each unit of a
product are called direct product costs. Whereas those which cannot be
traced to a specific unit are indirect product costs. Thus direct material cost
and direct labor cost are direct product costs whereas manufacturing
overhead cost is indirect product cost.

PRIME COSTS VS CONVERSION COSTS

Prime costs are the sum of all direct costs such as direct materials, direct
labor and any other direct costs.

Conversion costs are all costs incurred to convert the raw materials to finished
products and they equal the sum of direct labor, other direct costs (other
than materials) and manufacturing overheads.

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 FIXED COSTS VS VARIABLE COSTS

Fixed costs are costs which remain constant within a certain level of output or
sales. This certain limit where fixed costs remain constant regardless of the
level of activity is called relevant range. For example, depreciation on fixed
assets, etc.

Variable costs are costs which change with a change in the level of activity.
Examples include direct materials, direct labor, etc.

Mixed costs (also called semi-variable costs) are costs which have both a
fixed and a variable component.

SUNK COSTS VS OPPORTUNITY COSTS

Sunk costs are those costs that have been irreversibly incurred or committed;
they may also be termed unrecoverable costs.

Opportunity costs which are costs of a potential benefit foregone. For

example the opportunity cost of going on a picnic is the money that you
would have earned in that time.

GENERAL ECONOMIC ENVIRONMENT

 There are numerous general economic concepts that must be taken into account in
engineering studies.
 In broad terms, economics deals with the interactions between people and wealth,
and engineering is concerned with the cost-effective use of scientific knowledge to
benefit humankind.

This section introduces some of these basic economic concepts and indicates how they
may be factors for consideration in engineering studies and managerial decisions.

CONSUMER AND PRODUCER GOODS AND SERVICES

The goods and services that are produced and utilized may be divided conveniently into
two classes.

Consumer goods and services are those products or services that are directly used
by people to satisfy their wants. Food, clothing, homes, cars, television sets, haircuts,
opera, and medical services are examples.

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 The providers of consumer goods and services must be aware of, and are subject
to, the changing wants of the people to whom their products are sold.

Producer goods and services are used to produce consumer goods and services or
other producer goods. Machine tools, factory buildings, buses, and farm machinery
are examples.

NECESSITIES vs LUXURIES

Goods and services may be divided into two types: necessities and luxuries.
Obviously, these terms are relative because for most goods and services, what one
considers a necessity may be considered a luxury by another.

For example: a person living in one community may find a car is a necessity to get to
and from work. If the same person lived and worked in a different city with adequate
public transportation, a car would be a luxury.

PRICE and DEMAND

There is a relationship between the price that must be paid and the quantity
that will be demanded or purchased. This general relationship is depicted in
the figure below.
As the selling price per unit (p) is increased, there will be less demand (D) for
the product, and as the selling price is decreased, the demand will increase.

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 COMPETITION
Because economic laws are general statements regarding the interaction of people
and wealth, they are affected by the economic environment in which people and
wealth exists.

Perfect competition occurs in a situation in which any given product is supplied

by a large number of vendors and there is no restriction on additional suppliers
entering the market. Under such conditions, there is assurance of complete
freedom from both buyer and seller.

Monopoly is the opposite of perfect competition. A perfect monopoly exists

when a unique product or service is only available from a single supplier and
that vendor can prevent the entry of all others into the market. Under such
conditions, the buyer is at the complete mercy of the supplier in terms of
availability and price of the product.

ACCOUNTING FUNDAMENTALS
Accounting is often referred to as the language of business. Engineers should make
serious effort to learn about a firm’s accounting practice so that they can better
communicate with top management.

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 The following diagram shows relationship of business with various parties

Accounting is a system for measuring, processing, and communicating financial

information. It is often referred to as the language of business.

A key product of an accounting information system, financial statements allow people to

make informed business decision.

THE ACCOUNTING EQUATION

-is the most basic tool of accounting
-this equation presents the resources of the business and claims to those
sources.

Assets = Liabilities + Owner’s Equity

Economic = Claims to Economic Resources

Resources

Assets – (economic resources) examples are cash, land, building, furniture

Liabilities – (outsider claims) financial obligations to outsiders called the

creditors.

Owner’s Equity – (insiders claim) claims held by the owners of the business.
This means that if the business has no liabilities then all the assets belongs to the
owner because assets = owner’s equity.

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 ACCOUNTING FOR BUSINESS TRANSACTION

Transaction- is any event that affect the financial positions of the business entity.
- a transaction always has a value received and value parted with
- Value – property, cash, service, or a right.

Ex1: Mr Lee bought land for the business

Value received- land
Value parted with – cash

Ex2: Mr. Lee paid the salary of helper.

Value received – services
Value parted with- cash

Ex3: Mr Lee sold goods on account.

Value received – right to collect from customer
Value parted with is goods

Transactions affect a business’s assets, liabilities, and owner’s equity.

Therefore every transaction affects the accounting equation.

Transaction 1 (T1): Mr. Lee invested cash of P100,000 and land worth P300,000 in the
business.

Assets = Liabilities + Owner’s Equity

Cash P100,000 Mr. LEE Capital – P400,000
Land 300,000

Transaction 2 (T2): Mr. Lee borrowed P100,000 from the bank.

Assets Liabilities =
+ Owner’s Equity
Cash – 200,000 Accounts Mr. LEE Capital – P400,000
Land – 300,000 Payable to Bank
- P100,000
Showing the effect of T1 and T2 in the accounting equation using the table:
Transaction Asset Liabilities Owner’s Equity
Cash Land
T1 100,000 300,000 400,000
T2 100,000 100,000

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 Expanded Accounting Equation

Assets = Liabilities + (Beginning Owner’s Equity + revenue –expenses)

T3: Mr. Lee received P20,000 cash for services rendered to customer

Assets = Liabilities + Owner’s Equity

Cash – 220,000 Accounts Mr. LEE Capital –P400,000
Land – 300,000 Payable to Bank Service Income – 20,000
P100,00

T4 –Mr. Lee paid P5,000 the salary of his helper.

Assets = Liabilities + Owner’s Equity

Cash – 215,000 Accounts Mr. LEE Capital –P400,000
Land – 300,000 Payable to Bank Service Income – 20,000
P100,00 Salary Expense – 5,000

Transaction Asset Liabilities Owner’s Equity

Cash Land Owner’s Income or Expense
Equity Revenue
T1 +100,000 +300,000 +400,000
T2 +100,000 +100,000
T3 +20,000 +20,000
T4 -5,000 -5,000

THE BALANCE SHEET

- Shows the financial condition of the business.
- It follows the format of the accounting equation.
- The balance sheet is affected whenever there is a transaction.

MR Lee
BALANCE SHEET

Assets Liabilities and Capital

Cash P 215,000 Accounts Payable to Bank P100,000
Land 300,000 Mr. LEE Capital 400,000
________ Add: Profit 15,000 415,000
Total Assets P 515,000 Total Liabilities and Capital P515,000

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 INCOME STATEMENT
-It is an itemized statement summarizing the changes in proprietorship resulting from
the business operations between dates.

-It follows the format of the profit equation.

Profit = Income/ Revenue - Expenses

-The purpose is to provide the owner/s with information regarding the progress of the
business at regular intervals (month, quarter, semester, or year).

-Most companies use the year as the accounting period.

Mr. Lee
Income Statement

Income P20,000
Less: Salary Expense 5,000
Net Income/Profit P15,000
=====

TYPES OF BUSINESS ORGANIZATIONS

- A business takes one of three forms of organization:

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 Difference between Balance sheet of Sole Proprietorship, Partnership and
Corporation

For sole and partnership, the balance sheet presentation is the same except for
multiple capital for partnership.

example
A and B Partnership
Balance Sheet

Assets Liabilities and Partner’s Equity

Cash Accounts Payable

Accounts Receivable A, Capital
Equipment B, Capital

For corporation, the balance sheet is different in the owner’s equity because the
capitalization of a corporation is in the form of capital stock

example
Mlab Corporation
Balance Sheet

Assets Liabilities and Stockholder’s Equity

Cash Accounts Payable

Account Receivable Common Stock
Equipment Retained Earnings

Difference between the Income Statement for Service type, Merchandising, and
Manufacturing Firm

For Service type:

Mr X Laundry Service
Income Statement
For the month of December

Income from service P 100,000

Less: Operating Expenses 60,000
Net Profit P 40,000
======

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 For Merchandising Business (engaged in buying and selling):

Mr X Dry Goods
Income Statement
Sales P100,000
Less Cost of Goods Sold 60,000
Gross Profit from Sales 40,000
Less: Operating expense
Selling 5,000
Administrative 5,000 10,000
P 30,000
=====

For Manufacturing Firm:

Llan Manufacturing Company

Income Statement
For the Year Ended December 31, 2000

Sales P1,000,000
Less Cost of good Manufactured and Sold 400,000
Gross Profit 600,000
Less: Selling Expenses 200,000
Net Income from Sales 400,000
Less: Administrative Expenses 100,000
Net Income for the year P 300,000
=====
Cost of Goods Manufactured
Raw Materials Used P150,000
Direct Labor 150,000
Factory Overhead 100,000
Total P400,000
======

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 PRESENT ECONOMY

 When alternatives for accomplishing a specific task are being compared over
one year of less and the influence of time on money can be ignored.

 The rules, or criteria, shown below will be used to select the preferred
alternatives when defect-free output is variable or constant among the
alternatives being considered.

Rule 1 : When revenues/income and other economic benefit 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 serviced produced.

Rule 2 : When revenues/income and other economic benefit are not present or are
constant among all alternatives, consider only the costs and select the alternative
that minimizes total costs per defect-free unit of product or service output.

Illustrative Example on how to make present economy studies:

Choosing the Most Economic Material for a Part

Sample Problem: A good example of this situation is illustrated by a part for which annual
demand is 100,000 units. The part is produced on a high-speed turret lathe, using 1112 screw-
machine steel costing $0.30 per pound. A study was conducted to determine whether it
might be cheaper to use brass screw stock, costing $1.40 per pound. Because the weight of
steel required per piece was 0.0353 pounds and that of brass was 0.0384 pounds, the
material cost per piece was $0.0106 for steel and $0.0538 for brass. However, when the
manufacturing engineering department was consulted, it was found that, although 57.1

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 defect-free parts per hour were being produced by using steel, the output would be 102.9
defect-free parts per hour if brass were used. Which material should be used for this part?

Solution

The machine attendant is paid $15.00 per hour, and the variable (i.e., traceable) overhead
costs for the turret lathe are estimated to be $10.00 per hour. Thus, the total cost comparison
for the two materials is as follows:

1112 Steel Brass

Material $0.30 x 0.0353 = $0.0106 $1.40 x 0.0384 = $0.0538
Labor $15.00/57.1 = 0.2627 $15.00/102.9 = 0.1458
Variable $10.00/57.1 = 0.1751 $10.00/102.9 = 0.0972
overhead
Total cost $0.4484 $0.2968
per piece
Saving per piece by use of = $0.4484 — $0.2968 = 0.1516
brass

Because 100,000 parts are made each year, revenues are constant across the
alternatives. Rule 2 would select brass, and its use will produce a savings of $151.60 per
thousand (a total of $15,160 for the year). It is also clear that costs other than the cost of
material (such as labor and overhead) were important in the study. Answer

Choosing the Most Economical Machine for Production

Sample Problem: Two currently owned machines are being considered for the production
of a part. The capital investment associated with the machines is about the same and can
be ignored for purposes of this example. The important differences between the machines
are their production capacities (production rate x available production hours) and their
reject rates (percentage of parts produced that cannot be sold). Consider the following
table:

Machine A Machine B
Production rate 100 parts/hour 130 parts/hour
Hours available for 7 hours/day 6 hours/day
production
Percent parts rejected 3% 10%

The material cost is $6.00 per part, and all defect-free parts produced can be sold for $12
each. (Rejected parts have negligible scrap value.) For either machine, the operator cost
is $15.00 per hour and the variable overhead rate for traceable costs is $5.00 per hour.

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 (a) Assume that the daily demand for this part is large enough that all defect-free parts
can be sold. Which machine should be selected?

(b) What would the percent of parts rejected have to be for Machine B to be as profitable
as Machine A?

Solution

(a) Rule 1 applies in this situation because total daily revenues (selling price per part times
the number of parts sold per day) and total daily costs will vary dending on the machine
chosen. Therefore, we should select the machine that will maximize the profit per day:

Profit per day = Revenue per day — Cost per day

= (Production rate)(Production hours)($12/part) x [1 — (%rejected/100)] — (Production

rate) (Production hours) ($6/part)

— (Production hours) ($15/hour + $5/hour).

Machine A: Profit per day = (100 parts/hour) (7 hours/ day ) ($12/part) (1-10.03) — (100
parts/hour) (7 hours/day) ($6/part)

— (7 hours/day) ($15/hour + $5/hour) = $3,808 per day.

Machine B: Profit per day = (130 parts/hour) (6 hours/day) ( $12/part) (1-10.10) — (130
parts/hour) (6 hours/day) ($6/part) — (6 hours/day) ($15/hour + $5/hour) = $3,624 per day.

Therefore, select Machine A to maximize profit per day. Answer

(b) To find the breakeven percent of parts rejected, X, for Machine B, set the profit per day
of Machine A equal to the profit per day of Machine B, and solve for X:

$3,808/day = (130 parts/hour) (6 hours/day) ($12/part) (1—X) — (130 parts/hour) x (6

hour/day) ($6/part ) — (6 hours/day) ($15/hour + $5/hour)

Thus, X = 0.08, so the percent of parts rejected for Machine B can be no higher
than 8% for it to be as profitable as Machine A. Answer

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 Self Assessment 1.2. Try your skill by answering the following problems: Submit you
solution in the Google Classroom under classwork Self Assessment 1.2

1. Record the effect of the following transactions on the accounting equation using a table similar to
the example.

a. Owen inherited $20,000 and invested the cash in the business.

b. Performed services for a client and received cash of $700.
c. Purchased supplies on account, $1,000
d. Invested personal cash of $1,000 in the business.
e. Performed services to clients and received cash of $2,400
f. Paid office rent expenses, $ 900 and advertising expense $100.
g. Withdrew cash of $1,800 for personal use.

Prepare Income Statement and Balance Sheet.

2. Investing in Electrical Efficiency

Two pumps capable of delivering 100 hp to an agricultural application are being evaluated in
a present economy study. The selected pump will only be utilized for one year, and it will
have no market value at the end of the year. Pertinent data are summarized as follows:

ABC Pump XYZ Pump

Purchase price $2,900 $6,200
Maintenance cost $170 $510
Efficiency 80% 90%

If electric power costs $0.10 per kWh and the pump will be operated 4,000 hours per year,
which pump should be chosen? Recall that 1 hp = 0.746 kW.

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 Graded Assignment: Please submit the case study in the Google Classroom under the
classwork Case Study 1.1

CASE STUDY 1.1 The Economics of Daytime Running Lights

The use of Daytime Running Lights (DRLs) has increased in popularity with car designers
throughout the world. In some countries, motorists are required to drive with their
headlights on at all times. U.S. car manufacturers now offer models equipped with daytime
running lights. Most people would agree that driving with the headlights on at night is cost
effective with respect to extra fuel consumption and safety considerations (not to mention
required by law!). Cost effective means benefits outweigh (exceed) the costs. However,
some consumers have question whether it is cost effective to drive with your headlights on
during the day.

In an attempt to provide an answer to this question, let us consider the following suggested
data:

75% of driving takes place during the daytime.

2% of fuel consumption is due to accessories (radio, headlights, etc.).
Cost of fuel = $4.00 per gallon.
Average distance travelled per year = 15,000 miles.
Average cost of an accident = $2,800.
Purchase price of headlights = $25.00 per set (2 headlights).
Average time car is in operation per year = 350 hours.
Average life of a headlight = 200 operating hours.
Average fuel consumption = 1 gallon per 30 miles.

Let's analyze the cost effectiveness of driving with headlights on during the day by
considering the following set of questions:

 What are the extra costs associated with driving with headlights on during the
day?
 What are the benefits associated with driving with headlights on during the day?
 What additional assumptions (if any) are needed to complete the analysis?
 Is it cost effective to drive with headlights on during the day?

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 Module 1 Evaluative Assessment

Problem Solving: Please answer the following problems and submit to google classroom under
classwork Module 1 Evaluative Assessment.

1. a) State the expanded accounting equation.

b) Explain the meaning of each term in the equation
2. On January 1, Orange Crates had assets of P30,000 and owner’s equity of P20,000.
During the year, the company had cash revenue or income of P10,000, cash expenses of
P8,000, paid 3,000 to its creditors, and its owner withdrew P1,000. What are the assets,
liabilities, and owner’s equity at the end of the year?
3. Determine the value received and value parted with for the following transactions:
Value Received Value Parted With
a) Paid rent.
b) Rendered professional services for cash.
c) Withdrew P100 for personal service.
d) Paid the balance of P350 on a typewriter
previously purchased on account.
e) Purchased office supplies.
4. Raymond opened the Muscles Fitness Gym in August. The Following transactions
occurred during the first month of the business:
a) Raymond invested P100,000 in cash and 30,000 in gym equipment in the business.
b) Paid P10,000 for the first month’s rent.
c) Purchased supplies costing P4,000 on credit.
d) Purchased exercise equipment costing P25,000 for 15,000 cash and the rest on
account.
e) Recorded income for the first half of the month of P6,500 in cash and P3,500 on
account.
f) Paid P2,750 to a creditor on account.
g) Received payment from a customer on account for P1600.
h) Raymond withdrew P500 for a graduation gift.
i) Paid aerobics instructor her salary, P3,000.
j) Paid miscellaneous expense P1,500
k) Recorded income for the second half of the month of P5,600 in cash.

Prepare a new accounting equation every time a transaction occurs.

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 5. In the design of an automobile engine part, an engineer has a choice of either
steel casting or an aluminum alloy casting. Either machine provides the same
service. However, the steel casting weighs 8 ounces, compared with 5 ounces for
the aluminum casting. Every pound of extra weight in the automobile has been
assigned a penalty of $6 to account for increased fuel consumption during the
life cycle of the car. The steel casting costs $3.20 per pound, while the aluminum
allow can be cast for $7.40 per pound. Machining cost per casting are $5.00 for
steel and $4.20 for aluminum. Which material should the engineer select, and
what is the difference in unit costs? 1 pound = 16 ounce

References
Main Reference:

Sullivan, W. G, Wicks, E.M. and Koelling C.P (2014). Engineering Economy. Pearson
Education, LImited.

Eshenbach, Ted G. (2011). Engineering Economy: Applying Theory to Practice. New

York. Oxford University Press

Sta Maria, Hipolito (2000). Engineering Economy. National Bookstore.

Blank, Leland and Tarquin Anthony (2018). Engineering Economy

, McGraw-Hill

End of Module 1

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