Engineering Economy 16th Edition Sullivan Solutions Manual

Solutions to Chapter 2 Problems

A Note To Instructors: Because of volatile energy prices in today's world, the instructor is encouraged to vary energy
prices in affected problems (e.g. the price of a gallon of gasoline) plus and minus 50 percent and ask students to
determine whether this range of prices changes the recommendation in the problem. This should make for stimulating in-
class discussion of the results.

2-1 The total mileage driven would have to be specified (assumed) in addition to the variable cost of fuel per
unit (e.g. $ per gallon). Also, the fixed cost of both engine blocks would need to be assumed. The
efficiency of the traditional engine and the composite engine would also need to be specified

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 2-2 Fixed Variable
Raw Materials X
Direct Labor X
Supplies X
Utilities* X X
Property Taxes X
Administrative Salaries X
Payroll Taxes X X
Insurance-Building and Equipment X
Clerical Salaries X
Sales Commissions X
Rent X
Interest on Borrowed Money X
*
Classification is situation dependent

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 1,000,000 miles/year
2-3 (a) # cows = = 182.6 or 183 cows
(365 days/year)(15 miles/day)

Annual cost = (1,000,000 miles/year)($5 / 60 miles) = $83,333 per year

1,000,000 miles/year
(b) Annual cost of gasoline = ($3/gallon) = $100,000 per year
30 miles/gall on

It would cost $16,667 more per year to fuel the fleet of cars with gasoline.

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 2-4 Cost Site A Site B
Rent = $5,000 = $100,000
Hauling (4)(200,000)($1.50) = $1,200,000 (3)(200,000)($1.50) = $900,000
Total $1,205,000 $1,000,000
Note that the revenue of $8.00/yd3 is independent of the site selected. Thus, we can maximize
profit by minimizing total cost. The solid waste site should be located in Site B.

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 2-5 Stan’s asking price of $4,000 is probably too high because the new transmission adds little value to the
N.A.D.A. estimate of the car’s worth. (Low mileage is a typical consideration that may inflate the
N.A.D.A. estimate.) If Stan can get $3,000 for his car, he should accept this offer. Then the $4,000 -
$3,000 = $1,000 “loss” on his car is a sunk cost.

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 2-6 The $97 you spent on a passport is a sunk cost because you cannot get your money back. If you decide
to take a trip out of the U.S. at a later date, the passport’s cost becomes part of the fixed cost of making
the trip (just as the cost of new luggage would be).

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 2-7 If the value of the re-machining option ($60,000) is reasonably certain, this option should be chosen.
Even if the re-machined parts can be sold for only $45,001, this option is attractive. If management is
highly risk adverse (they can tolerate little or no risk), the second-hand market is the way to proceed to
guarantee $15,000 on the transaction.

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 2-8 The certainty of making $200,000 - $120,000 = $80,000 net income is not particularly good. If your
friend keeps her present job, she is turning away from a risky $80,000 gain. This “opportunity cost” of
$80,000 balanced in favor of a sure $60,000 would indicate your friend is risk averse and does not want
to work hard as an independent consultant to make an extra $20,000 next year.

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 2-9 (a) If you purchase a new car, you are turning away from a risky 20% per year return. If you are a risk
taker, your opportunity cost is 20%, otherwise; it is 6% per year.

(b) When you invest in the high tech company’s common stock, the next best return you’ve given up is
6% per year. This is your opportunity cost in situation (b).

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 2-10 (a) The life cycle cost concept encompasses a time horizon for a product, structure, system, or service
from the initial needs assessment to final phaseout and disposal activities. Definition of
requirements; conceptual design, advanced development, and prototype testing; detailed design and
resource acquisition for production or construction; actual production or construction; and operation
and customer use, and maintenance and support are other primary activities involved during the life
cycle.
(b) The acquisition phase includes the definitions of requirements as well as the conceptual and detailed
design activities. It is during these activities that the future costs to produce (or construct), operate,
and maintain a product, structure, system, or service are predetermined. Since these future costs
(during the operation phase) are 80-90 percent of the life cycle costs, the greatest potential for
lowering life cycle costs is during the acquisition phase (in the definition of requirements and design
activities).

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 2-11 (a)

Dollars ($)
TR
CF
CT

0 62 132
Number of Passengers

(b) Fixed costs that could change the BE point from 62 passengers to a lower number include: reduced
aircraft insurance costs (by re-negotiating premiums with the existing insurance company or a new
company), lower administrative expenses in the front office, increased health insurance costs for the
employees (i.e. lowering the cost of the premiums to the airline company) by raising the deductibles
on the group policy.

(c) Variable costs that could be reduced to lower the BE point include: no more meals on flights, less
external air circulated throughout the cabin, fewer flight attendants. Note: One big cost is fuel,
which is fixed for a given flight but variable with air speed. The captain can fly the aircraft at a
lower speed to save fuel.

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 2-12 Re-write the price-demand equation as follows: p = 2,000 - 0.1D. Then,

TR = p  D = 2,000D - 0.1D2.

The first derivative of TR with respect to D is

d(TR) / dD = 2,000 - 0.2D


This, set equal to zero, yields the D that maximizes TR. Thus,

2,000 - 0.2 D = 0

D = 10,000 units per month

What is needed to determine maximum monthly profit is the fixed cost per month and the variable cost
per lash adjuster.

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 2-13 p = 150  0.01D CF = $50,000 cv = $40/unit

Profit = 150D  0.01D2  50,000  40D = 110D  0.01D2  50,000

d(Profit)/dD = 110  0.02D = 0


D = 5,500 units per year, which is less than maximum anticipated demand

At D = 5,500 units per year, Profit = $252,500 and p = $150  0.01(5,500) = $95/unit.

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 2-14 (a) p = 600 - 0.05D; CF = $800,000/month; cv = $155.50 per unit
The unit demand, D, is one thousand board feet.
a - c v 600 - 155.50
D* = = = 4,445 units/month (Eqn. 2-10)
2b 2(0.05)

Profit (loss) = 600D - 0.05D2 - (800,000 + 155.50D)

= [600(4,445) - 0.05(4,445)2] - [$800,000 + $155.50(4,445)]
= $187,901.25 / month (maximum profit)

444.5  (444.5) 2  4(0.05)(800,000)

(b) D =
2(0.05)

444.5 - 193.86
D'1  = 2,506 units/month
0.1

444.5 + 193.86
D'2  = 6,383 units/month
0.1
Range of profitable demand is 2,506 units to 6,383 units per month.

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  2700 5000 
2-15 (a) Profit = 38   2  D - 1000 - 40D
 D D 
5000
= 38D + 2700 - -1000 - 40D
D
5000
Profit = -2D - + 1700
D
d (Profit) 5000
= -2 + =0
dD D2
5000
or, D2 = = 2500 and D* = 50 units per month
2

d 2 (Profit) 10,000
(b) = < 0 for D > 1
dD 2
D3

Therefore, D* = 50 is a point of maximum profit.

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 2-16 Profit = Total revenue - Total cost
= (15X - 0.2X2) - (12 + 0.3X + 0.27X2)
= 14.7X - 0.47X2 - 12
dProfit
= 0 = 14.7 - 0.94X
dX
X = 15.64 megawatts
d 2 Profit
Note: = - 0.94 thus, X = 15.64 megawatts maximizes profit
dX 2

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 2-17 Breakeven point in units of production:

CF = $100,000/yr; CV = $140,000/yr (70% of capacity)

Sales = $280,000/yr (70% of capacity); p = $40/unit
Annual Sales (units) = $280,000/$40 = 7,000 units/yr (70% capacity)

cv = $140,000/7,000 = $20/unit
C $100,000
D = F = = 5,000 units/yr
p - c v ($40 - $20)
or in terms of capacity, we have: 7,000units/0.7 = x units/1.0

Thus, x (100% capacity) = 7,000/0.7 = 10,000 units/yr

$5,000
D (% of capacity)  = 0.5 or 50% of capacity
(10,000

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 2-18 20,000 tons/yr. (2,000 pounds / ton) = 40,000,000 pounds per year of zinc are produced.

The variable cost per pound is $20,000,000 / 40,000,000 pounds = $0.50 per pound.

(a) Profit/yr = (40,000,000 pounds / year) ($1.00 - $0.50) - $17,000,000

= $20,000,000 - $17,000,000
= $3,000,000 per year

The mine is expected to be profitable.

(b) If only 17,000 tons (= 34,000,000 pounds) are produced, then

Profit/yr = (34,000,000 pounds/year)($1.00 - $0.50) - $17,000,000 = 0

Because Profit =0, 17,000 tons per year is the breakeven point production level for this mine. A loss
would occur for production levels < 17,000 tons/year and a profit for levels > 17,000 tons per year.

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 2-19 (a) BE = $1,500,000 / ($39.95 − $20.00) = 75,188 customers per month
(b) New BE point = $1,500,000 / ($49.95 − $25.00) = 60,120 per month
(c) For 63,000 subscribers per month, profit equals
63,000 ($49.95 − $25.00) − $1,500,000 = $71,850 per month
This improves on the monthly loss experienced in part (a).

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 CF $2,000,000
2-20 (a) D = = = 40,000 units per year
p - cv ($90 - $40) / unit

$10,000,000

$9,000,000
$8,000,000 Profit

$6,000,000 Breakeven
Point $6,000,000

$4,000,000 Loss

$2,000,000
Fixed Cost
D' = 40,000 units
$0
0 20,000 40,000 60,000 80,000 100,000
Number of Units

(b) Profit (Loss) = Total Revenue - Total Cost

(90% Capacity) = 90,000 ($90) - [$2,000,000 + 90,000 ($40)]
= $2,500,000 per year
(100% Capacity) = [90,000($90) + 10,000($70)] - [$2,000,000 + 100,000($40)]
= $2,800,000 per year

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 2-21 Annual savings are at least equal to ($60/lb)(600 lb) = $36,000. So the company can spend no more than
$36,000 (conservative) and still be economical. Other factors include ease of maintenance / cleaning,
passenger comfort and aesthetic appeal of the improvements. Yes, this proposal appears to have merit so
it should be supported.

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 2-22 Jerry’s logic is correct if the AC system does not degrade in the next ten years (very unlikely). Because
the leak will probably get worse, two or more refrigerant re-charges per year may soon become
necessary. Jerry’s strategy could be to continue re-charging his AC system until two re-charges are
required in a single year. Then he should consider repairing the evaporator (and possibly other faulty
parts of his system).

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 2-23 Over 81,000 miles, the gasoline-only car will consume 2,700 gallons of fuel. The flex-fueled car will
use 3,000 gallons of E85. So we have

(3,000 gallons)(X) + $1,000 = (2,700 gallons)($3.89/gal)

and
X = $3.17 per gallon

This is 18.5% less expensive than gasoline. Can our farmers pull it off – maybe with government
subsidies?

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 4.80
2-24 (a) Total Annual Cost (TAC) = Fixed cost + Cost of Heat Loss = 450X + 50 +
X1/ 2
d (TAC) 2.40
= 0 = 450 - 3/2
dX X
2.40
X 3/2 = = 0.00533
450
X* = 0.0305 meters

d 2 (TAC) 3.6
(b) 2
= > 0 for X > 0.
dX X5/ 2

Since the second derivative is positive, X* = 0.0305 meters is a minimum cost thickness.
(c) The cost of the extra insulation (a directly varying cost) is being traded-off against the value of
reduction in lost heat (an indirectly varying cost).

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 2-25 Annual Profit/Loss = Revenue – (Fixed Costs + Variable Costs)

= $300,000 – [$200,000 + (0.60)($300,000)]

= $300,000 – $380,000

= –$80,000

So the correct choice is (d).

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 2-26
$1,500n
C T = C o + C c = knv 2 +
v
dC T 1,500
= 0 = 2kv - 2 = kv 3 - 750
dv v
750
v=3
k

To find k, we know that

Co
= $100/mile at v = 12 miles/hr
n
Co
= kv 2 = k(12) 2 = 100
n
and
k = 100 / 144 = 0.6944
750
so, v = 3 = 10.25 miles / hr .
0.6944
The ship should be operated at an average velocity of 10.25 mph to minimize the total cost of operation
and perishable cargo.
Note: The second derivative of the cost model with respect to velocity is:
d 2CT n
2
= 1.388n + 3,000 3
dv v
The value of the second derivative will be greater than 0 for n > 0 and v > 0. Thus we have found a
minimum cost velocity.

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 2-27
R11 R19 R30 R38
A. Investment cost $1,800 $2,700 $3,900 $4,800
B. Annual Heating Load (106 Btu/yr) 74 69.8 67.2 66.2
C. Cost of heat loss/yr $1,609.50 $1,518.15 $1,461.60 $1,439.85
D. Cost of heat loss over 25 years $40,238 $37,954 $36,540 $35,996
E. Total Life Cycle Cost = A + D $42,038 $40,654 $40,440 $40,796

R30 is the most economical insulation thickness.

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 2-28 (293 kWh/106 Btu)($0.15/kWh) = $43.95/106 Btu

R11 R19 R30 R38

A. Investment cost $2,400 $3,600 $5,200 $6,400
6
B. Annual Heating Load (10 Btu/yr) 74 69.8 67.2 66.2
C. Cost of heat loss/yr $3,252 $3,068 $2,953 $2,909
D. Cost of heat loss over 25 years $81,308 $76,693 $73,836 $72,737
E. Total Life Cycle Cost = A + D $83,708 $80,293 $79,036 $79,137

Select R30 to minimize total life cycle cost.

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 dC C
2-29 (a)   I  CR t = 0
d 2
or, 2 = CI/CRt
and, * = (CI/CRt)1/2; we are only interested in the positive root.
d 2C 2C I
(b)   0 for  > 0
d2 3

Therefore, * results in a minimum life-cycle cost value.

(c) Investment cost versus total repair cost

C
CR··t

CI

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 100,000 100,000
2-30 ( - ) ($3.00/gallon) = $3,896
22 mpg 28 mpg
Total extra amount = $2,500 + $3,896 = $6,396
Assume the time value of money can be ignored and that comfort and aesthetics are comparable for the
two cars.

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 2-31 (a) With Dynolube you will average (20 mpg)(1.01) = 20.2 miles per gallon (a 1% improvement).
Over 50,000 miles of driving, you will save

50,000 miles 50,000 miles

  24.75 gallons of gasoline.
20 mpg 20.2 mpg

This will save (24.75 gallons)($4.00 per gallon) = $99.

(b) Yes, the Dynolube is an economically sound choice.

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 2-32 The cost of tires containing compressed air is ($200 / 50,000 miles) = $0.004 per mile. Similarly, the
cost of tires filled with 100% nitrogen is ($220 / 62,500 miles) = $0.00352 per mile. On the face of it,
this appears to be a good deal if the claims are all true (a big assumption). But recall that air is 78%
nitrogen, so this whole thing may be a gimmick to take advantage of a gullible public. At 200,000 miles
of driving, one original set of tires and three replacements would be needed for compressed-air tires.
One original set and two replacements (close enough) would be required for the 100% nitrogen-filled
tires. What other assumptions are being made?

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 2-33 Cost Factor Brass-Copper Alloy Plastic Molding
Casting / pc (25 lb)($3.35/lb) = $83.75 (20 lb)($7.40/lb) = $148.00
Machining /pc $ 6.00 0.00
Weight Penalty / pc (25 lb - 20 lb)($6/lb) = $30.00 0.00
Total Cost /pc $119.75 $148.00
The Brass-Copper alloy should be selected to save $148.00 - $119.75 = $28.25 over the life cycle of
each radiator.

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 2-34 (a) Machine A
Non-defective units/day = (100 units/hr)(7 hrs/day)(1 - 0.25)(1 - 0.03)
 509 units/day
Note: 3 months = (52 weeks/year)/4 = 13 weeks
Non-defective units/3-months = (13 weeks)(5 days/week)(509 units/day)
= 33,085 units (> 30,000 required)
Machine B
Non-defective units/day = (130 units/hr)(6 hrs/day)(1 - 0.25)(1 - 0.10)
 526 units/day
Non-defective units/3-months = (13 weeks)(5 days/week)(526 units/day)
= 34,190 units (> 30,000 required)

Either machine will produce the required 30,000 non-defective units/3-months

(b) Strategy: Select the machine that minimizes costs per non-defective unit since revenue for 30,000
units over 3-months is not affected by the choice of the machine (Rule 2). Also assume capacity
reductions affect material costs but not labor costs.
Machine A
Total cost/day = (100 units/hr)(7 hrs/day)(1 - 0.25)($6/unit)
+ ($15/hr + $5/hr)(7 hrs/day)
= $3,290/day
Cost/non-defective unit = ($3,290/day)/(509 non-defective units/day)
= $6.46/unit
Machine B
Total cost/day = (130 units/hr)(6 hrs/day)(1 - 0.25)($6/unit)
+ ($15/hr + $5/hr)(6 hrs/day)
= $3,630/day
Cost/non-defective unit = ($3,630/day)/(526 non-defective units/day)
= $6.90/unit

Select Machine A.

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 2-35 Strategy: Select the design which minimizes total cost for 125,000 units/year (Rule 2). Ignore the sunk
costs because they do not affect the analysis of future costs.

(a) Design A
Total cost/125,000 units = (12 hrs/1,000 units)($18.60/hr)(125,000)
+ (5 hrs/1,000 units)($16.90/hr)(125,000)
= $38,463, or $0.3077/unit
Design B
Total cost/125,000 units = (7 hrs/1,000 units)($18.60/hr)(125,000)
+ (7 hrs/1,000 units)($16.90/hr)(125,000)
= $33,175, or $0.2654/unit
Select Design B
(b) Savings of Design B over Design A are:
Annual savings (125,000 units) = $38,463 − $33,175 = $5,288
Or, savings/unit = $0.3077 − $0.2654 = $0.0423/unit.

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 2-36 Profit per day = Revenue per day – Cost per day
= (Production rate)(Production time)($30/part)[1-(% rejected+% tested)/100]
– (Production rate)(Production time)($4/part) – (Production time)($40/hr)

Process 1: Profit per day = (35 parts/hr)(4 hrs/day)($30/part)(1-0.2) –

(35 parts/hr)(4 hrs/day)($4/part) – (4 hrs/day)($40/hr)
= $2640/day
Process 2: Profit per day = (15 parts/hr)(7 hrs/day)($30/part) (1-0.09) –
(15 parts/hr)(7 hrs/day)($4/part) – (7 hrs/day)($40/hr)
= $2155.60/day

Process 1 should be chosen to maximize profit per day.

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 2-37 At 70 mph your car gets 0.8 (30 mpg) = 24 mpg and at 80 mph it gets 0.6(30 mpg) = 18 mpg. The extra
cost of fuel at 80 mph is:

(400 miles/18mpg – 400 miles/24 mpg)($4.00 per gallon) = $22.22

The reduced time to make the trip at 80 mph is about 45 minutes. Is this a good tradeoff in your
opinion? What other factors are involved?

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 2-38 5(4X + 3Y) = 4(3X + 5Y) where X= units of profit per day from an 85-octane pump and Y= units of
profit per day from an 89-octane pump. Setting them equal simplifies to 8X = 5Y, so the 89-octane
pump is more profitable for the store.

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 2-39 When electricity costs $0.15/kWh and operating hours = 4,000:

CostABC = (100 hp/0.80)(0.746 kW/hp)($0.15/kWh)(4,000 h/yr) +$2,900 +$170 = $59,020

CostXYZ = (100 hp/0.90)(0.746 kW/hp)($0.15/kWh)(4,000 h/yr) +$6,200 +$510 = $56,443

Select pump XYZ.

When electricity costs $0.15/kWh and operating hours = 4,000:

CostABC = (100 hp/0.80)(0.746 kW/hp)($0.15/kWh)(3,000 h/yr) +$2,900 +$170 = $45,033

CostXYZ = (100 hp/0.90)(0.746 kW/hp)($0.15/kWh)(3,000 h/yr) +$6,200 +$510 = $44,010

Select pump XYZ.

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 2-40 Option A (Purchase):
CT = (10,000 items)($8.50/item) = $85,000
Option B (Manufacture):
Direct Materials = $5.00/item
Direct Labor = $1.50/item
Overhead = $3.00/item
$9.50/item
CT = (10,000 items)($9.50/item) = $95,000

Choose Option A (Purchase Item).

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 2-41 Assume you cannot stand the anxiety associated with the chance of running out of gasoline if you elect to
return the car with no gas in it. Therefore, suppose you leave three gallons in the tank as “insurance”
that a tow-truck will not be needed should you run out of gas in an unfamiliar city. The cost (i.e., the
security blanket) will be ($3.50 + $0.50 = $4.00) x 3 gallons = $12.00. If you bring back the car with a
full tank of gasoline, the extra cost will be $0.50 x the capacity, in gallons, of the tank. Assuming a 15-
gallon tank, this option will cost you $7.50. Hence, you will save $12.00  $7.50 = $4.50 by bringing
back the car with a full tank of gasoline.

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 2-42 Assumptions: You can sell all the metal that is recovered

Method 1: Recovered ore = (0.62)(100,000 tons) = 62,000 tons

Removal cost = (62,000 tons)($23/ton) = $1,426,000
Processing cost = (62,000 tons)($40/ton) = $2,480,000
Recovered metal = (300 lbs/ton)(62,000 tons) = 18,600,000 lbs
Revenues = (18,600,000 lbs)($0.8 / lb) = $14,880,000
Profit = Revenues - Cost = $14,880,000 - ($1,426,000 + $2,480,000)
= $10,974,000
Method 2: Recovered ore = (0.5)(100,000 tons) = 50,000 tons
Removal cost = (50,000 tons)($15/ton) = $750,000
Processing cost = (50,000 tons)($40/ton) = $2,000,000
Recovered metal = (300 lbs/ton)(50,000 tons) = 15,000,000 lbs
Revenues = (15,000,000 lbs)($0.8 / lb) = $12,000,000
Profit = Revenues - Cost = $12,000,000 - ($750,000 + $2,000,000)
= $9,250,000
Select Method 1 (62% recovered) to maximize total profit from the mine.

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 2-43 Profit per ounce (Method A) = $1,750 - $550 / [(0.90 oz. per ton)(0.90)] = $1,750 - $679

= $1,071 per ounce

Profit per ounce (Method B) = $1,750 - $400 / [(0.9 oz. per ton)(0.60) =$1,750 - $741

= $1,009 per ounce

Therefore, by a slim margin we should recommend Method A.

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 2-44 (a) False; (d) False; (g) False; (j) False; (m) True;
(p) False; (s) False
(b) False; (e) True; (h) True; (k) True; (n) True; (q) True;
(c) True; (f) True; (i) True; (l) False; (o) True; (r) True;

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 1,750,000 Btu lb coal 

2-45 (a) Loss   12,000 Btu   486 lbs of coal
0.30

(b) 486 pounds of coal produces (486)(1.83) = 889 pounds of CO2 in a year.

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 2-46 (a) Let X = breakeven point in miles
Fuel cost (car dealer option) = ($2.00/gal)(1 gal/20 miles) = $0.10/mile
Motor Pool Cost = Car Dealer Cost
($0.36/mi) X = (6 days) ($30/day) + $0.20/mi + $0.10/mi X
$0.36X = 180 + $0.30X and X = 3,000 miles

(b) 6 days (100 miles/day) = 600 free miles

If the total driving distance is less than 600 miles, then the breakeven point equation is given by:
($0.36/mi)X = (6 days)($30 /day) + ($0.10/mi)X
X = 692.3 miles > 600 miles
This is outside of the range [0, 600], thus renting from State Tech Motor Pool is best for distances
less than 600 miles.
If driving more than 600 miles, then the breakeven point can be determined using the following
equation:
($0.36/mi)X = (6 days)($30 /day) + ($0.20/mi)(X - 600 mi) + ($0.10/mi)X
X = 1,000 miles The true breakeven point is 1000 miles.

(c) The car dealer was correct in stating that there is a breakeven point at 750 miles. If driving less
than 900 miles, the breakeven point is:
($0.34/mi)X = (6 days)($30 /day) + ($0.10/mi)X
X = 750 miles < 900 miles
However, if driving more than 900 miles, there is another breakeven point.
($0.34/mi)X = (6 days)($30/day) + ($0.28/mi)(X-900 mi) + ($0.10/mi)X
X = 1800 miles > 900 miles
The car dealer is correct, but only if the group travels in the range between 750 miles and 1,800
miles. Since the group is traveling more than 1,800 miles, it is better for them to rent from State
Tech Motor Pool.
This problem is unique in that there are two breakeven points. The following graph shows the two
points.

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 2-46 continued

Car Dealer v. State Tech Motor Pool

$1,000
$900
$800 X2' = 1,800 miles
$700
Total Cost

$600
$500 X1' = 750 miles
$400
$300 Car Dealer
$200
$100 State Tech
$0
0 500 1000 1500 2000 2500
Trip Mileage

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 2-47 This problem is location specific. We’ll assume the problem setting is in Tennessee. The eight years
($2,400 / $300) to recover the initial investment in the stove is expensive (i.e. excessive) by traditional
measures. But the annual cost savings could increase due to inflation. Taking pride in being “green” is
one factor that may affect the homeowner’s decision to purchase a corn-burning stove.

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 Solutions to Spreadsheet Exercises

2-48

A B C D E F G H I J K L M N O P
Fixed cost/ Demand Start
1 mo. = $ 73,000 point (D) = 0 Net Income
Variable Demand
2 cost/unit = $ 83 Increment = 250
3 a= $ 180
4 b= $ 0.02 $40,000
5
Monthly Price per Total $20,000
6 Demand Unit Revenue Total Expense Net income
7 0 $ 180 $ - $ 73,000 $ (73,000) $-
8 250 $ 175 $ 43,750 $ 93,750 $ (50,000)

Net Income
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
9 500 $ 170 $ 85,000 $ 114,500 $ (29,500) $(20,000)
10 750 $ 165 $ 123,750 $ 135,250 $ (11,500)
11 1000 $ 160 $ 160,000 $ 156,000 $ 4,000
$(40,000)
12 1250 $ 155 $ 193,750 $ 176,750 $ 17,000
13 1500 $ 150 $ 225,000 $ 197,500 $ 27,500
$(60,000)
14 1750 $ 145 $ 253,750 $ 218,250 $ 35,500
15 2000 $ 140 $ 280,000 $ 239,000 $ 41,000
16 2250 $ 135 $ 303,750 $ 259,750 $ 44,000 $(80,000)
17 2500 $ 130 $ 325,000 $ 280,500 $ 44,500
18 2750 $ 125 $ 343,750 $ 301,250 $ 42,500 $(100,000)
19 3000 $ 120 $ 360,000 $ 322,000 $ 38,000 Volume (Demand)
20 3250 $ 115 $ 373,750 $ 342,750 $ 31,000
21 3500 $ 110 $ 385,000 $ 363,500 $ 21,500
22 3750 $ 105 $ 393,750 $ 384,250 $ 9,500
23 4000 $ 100 $ 400,000 $ 405,000 $ (5,000) $600,000
24 4250 $ 95 $ 403,750 $ 425,750 $ (22,000)
25 4500 $ 90 $ 405,000 $ 446,500 $ (41,500)
26 4750 $ 85 $ 403,750 $ 467,250 $ (63,500) $500,000
27 5000 $ 80 $ 400,000 $ 488,000 $ (88,000)
28 5250 $ 75 $ 393,750 $ 508,750 $ (115,000)
29 5500 $ 70 $ 385,000 $ 529,500 $ (144,500) $400,000
30
Cash Flow

31 Total Revenue
32 Summary of impact of changes in cost components on optimum $300,000
Total Expense
33 demand and profitable range of demand.
34
35 Percent Change $200,000
36 CF cv D* D1 ' D2 '
37 -10% -10% 2,633 724 4541
$100,000
38 0% -10% 2,633 824 4443
39 10% -10% 2,633 928 4339
40 -10% 0% 2,425 816 4036
$-
41 0% 0% 2,425 932 3918
42 10% 0% 2,425 1060 3790
0

00

00

00

00

00

00

00

00

00
0
50

10

15

20

25

30

35

40

45

50
43 -10% 10% 2,218 940 3495
44 0% 10% 2,218 1092 3343 Volume (Demand)
45 10% 10% 2,218 1268 3167
46
47
48 $600,000
49
50 $500,000
51
52
$400,000
53
54
55 $300,000
Cash Flow

56 Total Revenue
57 $200,000 Total Expense
58 Net income
59 $100,000
60
61 $-
62
63 $(100,000)
64
65
$(200,000)
66
67
0

00

00

00

00

00

00

00

00

00

00
0
50

10

15

20

25

30

35

40

45

50

55

68
69 Volume (Demand)
70
71

Reducing fixed costs has no impact on the optimum demand value, but does broaden the profitable range
of demand. Reducing variable costs increase the optimum demand value as well as the range of
profitable demand.

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 2-49 New annual heating load = (230 days)(72 °F  46 °F) = 5,980 degree days. Now, 136.7  106 Btu are
lost with no insulation. The following U-factors were used in determining the new heating load for the
various insulation thicknesses.

U-factor Heating Load

R11 0.2940 101.3  106 Btu
R19 0.2773 95.5  106 Btu
R30 0.2670 92  106 Btu
R38 0.2630 90.6  106 Btu

6
$/kWhr $/10 Btu
Energy Cost $0.086 $25.20

R11 R19 R30 R38

Investment Cost $ 900 $ 1,350 $ 1,950 $ 2,400
Annual Heating Load (106 Btu) 101.3 95.5 92 90.6
Cost of Heat Loss/yr $2,553 $2,406 $2,318 $2,283
Cost of Heat Loss over 25 years $63,814 $60,160 $57,955 $57,073
Total Life Cycle Cost $64,714 $61,510 $59,905 $59,473

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 Solutions to Case Study Exercises

2-50 In this problem we observe that "an ounce of prevention is worth a pound of cure." The ounce of
prevention is the total annual cost of daylight use of headlights, and the pound of cure is postponement
of an auto accident because of continuous use of headlights. Clearly, we desire to postpone an accident
forever for a very small cost.

The key factors in the case study are the cost of an auto accident and the frequency of an auto accident.
By avoiding an accident, a driver "saves" its cost. In postponing an accident for as long as possible, the
"annual cost" of an accident is reduced, which is a good thing. So as the cost of an accident increases,
for example, a driver can afford to spend more money each year to prevent it from happening through
continuous use of headlights. Similarly, as the acceptable frequency of an accident is lowered, the total
annual cost of prevention (daytime use of headlights) can also decrease, perhaps by purchasing less
expensive headlights or driving less mileage each year.

Based on the assumptions given in the case study, the cost of fuel has a modest impact on the cost of
continuous use of headlights. The same can be said for fuel efficiency. If a vehicle gets only 15 miles to
the gallon of fuel, the total annual cost would increase by about 65%. This would then reduce the
acceptable value of an accident to "at least one accident being avoided during the next 16 years." To
increase this value to a more acceptable level, we would need to reduce the cost of fuel, for instance.
Many other scenarios can be developed.

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 2-51 Suppose my local car dealer tells me that it costs no more than $0.03 per gallon of fuel to drive with my
headlights on all the time. For the case study, this amounts to (500 gallons of fuel per year) x $0.03 per
gallon = $15 per year. So the cost effectiveness of continuous use of headlights is roughly six times
better than for the situation in the case study.

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 Solutions to FE Practice Problems

2-52 p = 400 – D2
TR = p  D = (400 – D2) D = 400D – D3
TC = $1125 + $100  D
Total Profit / month = TR – TC = 400D - D3 - $1125 - $100D
= - D3 + 300D – 1125
dTP
= -3D2 + 300 = 0  D2 = 100  D* = 10 units
dD

d 2 TP d 2 TP
= -6D; at D = D*, = - 60
dD 2 dD 2

Negative, therefore maximizes profit.

Select (a)

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 2-53 - D3 + 300D – 1125 = 0 for breakeven
At D = 15 units; -153 + 300(15) – 1125 = 0

Select (b)

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 2-54 CF = $100,000 + $20,000 = $120,000 per year
CV = $15 + $10 = $25 per unit
p = $40 per unit

CF $120,000
D = = = 8,000 units/yr
p - c v ($40 - $25)

Select (c)

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 2-55 Profit = pD – (CF + CVD)
At D = 10,000 units/yr,
Profit/yr = (40)(10,000) – [120,000 + (25)(10,000)] = $30,000

Select (e)

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 2-56 Profit = pD – (CF + CVD)
60,000 = 35D – (120,000 + 25D)
180,000 = 10D; D = 18,000 units/yr

Select (d)

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 2-57 Annual profit/loss = Revenue - (Fixed costs + Variable costs)

= $300,000  [$200,000 + (0.60)($300,000)]

= $300,000  $380,000
= $80,000

Select (d)

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 2-58 Savings in first year = (7,900,000 chips) (0.01 min/chip) (1 hr/60 min) ($8/hr + 5.50/hr) = $17,775

Select (d)

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 Solutions to Problems in Appendix 2-A

2-A-1 (a) Details of transactions

(a) Smith invested $35,000 cash to start the business.

(b) Purchased $350 of office supplies on account.
(c) Paid $30,000 to acquire land as a future building site.
(d) Earned service revenue and received cash of $1,900.
(e) Paid $100 on account.
(f) Paid for a personal vacation, which is not a transaction of the business.
(g) Paid cash expenses for rent, $400, and utilities, $100.
(h) Sold office supplies for cost of $150.
(i) Withdrew $1,200 cash for personal use.

Analysis of Transactions:

OWNER’S Type of Owner’s

ASSETS LIABILITIES EQUITY Equity Transaction

Office
Cash + Supplies + Land Payable + Capital
(a) +35,000 +35,000 Owner investment
(b) + 350 + 350
(c) −30,000 +30,000
(d) + 1,900 +1,900 Service revenue
(e) − 100 = − 100
(f) N/A
(g) − 400 −400 Rent expense
− 100 −100 Utilities expense
(h) + 150 − 150
(i) − 1,200 −1,200 Owner withdrawal
Bal. 5,250 200 30,000 250 35,200

35,450 35,450

(b) Financial Statements of Campus Apartments Locators

Income Statement
Month Ended July 31, 2010

Revenue:
Service revenue ………………………………………………………. $1,900

Expenses:
Rent expense …………………………………………………………. $400
Utilities expense ……………………………………………………… 100
Total expenses ………………………………………………………... 500

Net income …………………………………………………………………… $1,400

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 2-A-1 continued
Statement of Owner’s Equity
Month Ended July 31, 2015

Jill Smith, capital, July 1, 2015 ……………………………………………… $ 0

Add: Investment by owner ………………………………………………… 35,000

Net income for the month …………………………………………… 1,400
36,400

Less: Withdrawals by owner ………………………………………………. (1,200)

Jill Smith, capital, July 31, 2015 ……………………………………………. $35,200

Balance Sheet
July 31, 2015

Assets Liabilities
Cash ………………………. $5,250 Accounts payable …………..……….. $ 250
Office supplies …………… 200
Land ……………………… 30,000 Owner’s Equity
Jill Smith, capital ……………………. 35,200

Total liabilities and

Total assets ………………. 35,450 owner’s equity ………………….. $35,450

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 2-A-2

OWNER'S
ASSETS = LIABILITIES + EQUITY
DANIEL TYPE OF
OWNER'S
ACCOUNTS ACCOUNTS LEAVY, EQUITY
CASH + RECEIVABLE + SUPPLIES + LAND = PAYABLE + CAPITAL TRANSACTION
Bal. 1,720 3,240 24,100 5,400 23,660
Owner
a) 12,000 12,000 investment
Bal. 13,720 3,240 24,100 5,400 35,660
b) -5,400 -5,400 0
Bal. 8,320 3,240 24,100 0 35,660
c) 1,100 1,100 Service revenue
Bal. 9,420 3,240 24,100 0 36,760
d) 750 -750 0
Bal. 10,170 2,490 24,100 0 36,760
e) 720 720 0
Bal. 10,170 2,490 720 24,100 720 36,760
f) 5000 5,000 Service revenue
Bal. 10,170 7,490 720 24,100 720 41,760
Owner
g) 1700 1,700 investment
Bal. 11,870 7,490 720 24,100 720 43,460
h) -1200 -1,200 Rent expense
Advertising
-660 -660 expense
Bal. 10,010 7,490 720 24,100 720 41,600
i) 80 -80 0
Bal. 10,090 7,490 640 24,100 720 41,600
j) -4000 -4,000 Owner withdrawal
Bal. 6,090 7,490 640 24,100 720 37,600

38,320 38,320

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 2-A-2 continued

Peavy Design
Income Statement
Month Ended May 31, 2015
Revenues:
Service revenue ($1,100 + $5,000) $ 6,100
Expenses:
Rent expense $1,200
Advertising expense 660
Total expenses 1,860
Net income $ 4,240

Peavy Design
Statement of Owner’s Equity
Month Ended May 31, 2015
Daniel Peavy, capital, April 30, 2015 $ 23,660
Add: Investments by owner ($12,000 + $1,700) 13,700
Net income for the month 4,240
41,600
Less: Withdrawals by owner (4,000)
Daniel Peavy, capital, May 31, 2015 $ 37,600

Peavy Design
Balance Sheet
May 31, 2015
ASSETS LIABILITIES
Cash $ 6,090 Accounts payable $ 720
Accounts receivable 7,490
Supplies 640 OWNER’S EQUITY
Land 24,100 Daniel Peavy, capital 37,600
Total liabilities and
Total assets $ 38,320 owner’s equity $ 38,230

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Engineering Economy 16th Edition Sullivan Solutions Manual

2-A-3 1. Overhead

Compensation for non-chargeable time, 0.15 x $3,600,000 $ 540,000

Other costs 1,449,000
----------------
(a) Total overhead $1,989,000
(b) Direct labor, 0.85 x $3,600,000 $3,060,000
----------------
Overhead application rate, (a) ÷ (b) 65%

2. Hourly rate:
$60,000 ÷ (48 x 40) = $60,000 ÷ 1,920 $31.25

Many students will forget that “his work there” includes an overhead application:

Direct labor, 10 x $31.25 $312.50

Applied overhead, $312.50 x 0.65 203.13
------------
Total costs applied $515.63

We point out that direct-labor time on a job is usually compiled for all classes of engineers and then
applied at their different compensation rates. Overhead is usually not applied on the piecemeal
basis demonstrated here. Instead, it is applied in one step after all the labor costs of the job have
been accumulated.

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